Sharp fall in India’s central tax collections

While the Indian government is busy formulating the Union budget, to be announced on February 1, there are reports that the direct tax collection this fiscal year may be even less than the preceding year – something that has not happened in two decades.

According to media reports as of January 23, the tax department has collected only 7.3 trillion rupees (US$102 billion), more than 5% less than the amount collected last year. Tax officials now fear this year’s collection may fall below the 11.5 trillion rupees collected in 2018-19.

In addition, indirect taxes may fall short by about 500 billion rupees on the drop in the Goods and Services Tax in a sluggish economy. India’s corporate and income tax collection has been badly affected by the sharp fall in economic growth and the recent announcement of a cut in corporate tax rates to boost investment.

The National Democratic Alliance government was targeting a direct tax collection of 13.5 trillion rupees ($189 billion) for this fiscal year, a 17% increase over the previous year.

However, a demand slowdown in Asia’s third-largest economy has led to lower tax collections. Many companies are cutting jobs and expansion plans due to falls in sales and rising levels of inventories. There has been an increase in the average number of days companies took to clear their inventory, called days’ sales of inventory.

Days’ sales of inventory, based on a sample of 196 S&P BSE 500 companies, had fallen at the beginning of 2019-20 (FY20), indicating improving sales momentum, but reversed in September, rising to 45.7 days compared to 44.5 days in March. Tax officials also say that a surprise cut in the headline corporate tax rate last year aimed at wooing manufacturers and boosting investment was another key reason behind the sluggish tax collections.

Direct taxes account for about 80% of the government’s projection for annual revenue and a shortfall may force the government to borrow to meet expenditure. Though the government had initially set a monthly target of one trillion rupees for its tax collection, it managed to achieve this only during April, May, July, November and December. It later revised the target to 1.1 trillion rupees for the last four months of the fiscal year.

Several experts including former finance secretary S C Garg indicated a tax shortfall of 2-2.5 trillion rupees during the current fiscal year. Last week the International Monetary Fund lowered the growth estimate for India to 4.8% for 2019 on the back of stress in the shadow banking sector and weak rural income growth.

Earlier this month, India’s National Statistical Office projected that the country’s gross domestic product growth would fall to an 11-year low of 5% in the current fiscal, mainly due to a poor showing by the manufacturing and construction sectors. The Reserve Bank of India also lowered its forecast for economic growth to 5% while announcing its bi-monthly monetary policy in December.

Tax sops unlikely

This tight fiscal situation may leave little room for Finance Minister Nirmala Sitharaman to provide any relief to the salaried class by offering any substantial reductions in personal income tax rates. Last September when Finance Minister Nirmala Sitharaman cut corporate tax rates, there were expectations that the salaried class would be provided a similar relief. But with a dip in the tax inflow the government is unlikely to accomplish this.