Direct tax numbers to put GDP in focus
Will also bring tax buoyancy under the scanner
The government did announce a major reduction in corporate tax rates in September to boost economic activity. These exemptions, the government estimated, would lead to a revenue loss of ~1.45 lakh crore. The 2019-20 Budget assumed total corporate tax and income tax collections in 2019-20 to be ~1.35 lakh crore more than the 2018-19 revised estimates of ~12 lakh crore.
So, one could argue that a contraction in direct tax collections is because of the corporate tax reduction. However, this need not be true because the 2018-19 RE direct tax figures are unlikely to be the actual numbers. The Controller General of Accounts gives total direct tax collections in 2018-19 to be only ~11.25 lakh crore. This figure is less than the ~11.5 lakh crore figure reported by Reuters.
If direct tax collections dip, it means that there is more to the revenue shortfall than just a reduction in corporate tax rates.
Third, does this mean tax buoyancy has gone down drastically in India?
Any reduction in tax buoyancy will be an embarrassment for a government which unleashed policies such as demonetisation to crack down on unaccounted incomes. Despite these measures, the government has not been able to achieve tax buoyancy levels that existed before the financial crisis hit in 2008-09. (See Chart 1)
If tax buoyancy has indeed gone down, does it mean India’s growth become less revenue generating in nature? A higher tax buoyancy number indicates that either the nature of growth is more revenue generating or the tax net is more effective at dealing with evasion. The reverse can be inferred if the tax buoyancy number goes down.
The Centre’s response to such a revenue shortfall, if it transpires, will also have an important bearing on the sanctity of the budgetary exercise. In the 2019-20 Budget presented in July, the Centre projected a higher RE figure for direct tax collections than the budget estimates (BE). CGA figures showed much lower revenue collections in 2018-19.
No provisional figures will be available for 2019-20 when the Budget is presented on February 1, 2020. Any attempts to temporarily hide the revenue shortfall through rosy assumptions — the Budget is only expected to give actual figures with a two year time lag — will only lead to loss of credibility and result in misplaced assumptions forming the basis of policymaking.