Tax estimate for FY20 likely to be slashed 4-6%

This will be the second time that the projection will be changed for the current fiscal year

Economic slowdown and reduction in corporation tax rates will require the government to trim its tax revenue projection for 201920 in the upcoming Budget by ~1-1.5 trillion, the biggest seen in recent times to arrive at a realistic target.

The shortfall means 4.1-6.1 per cent of the Budget estimate of ~24.61 trillion.

The cuts seem steep, but would be less than what was initially expected, sources said. The government had initially expected a ~1.45-trillion hit from corporation tax rate cuts only. This will be the second time that the tax projection will be changed for FY20 since the Interim Budget in February last year. It was initially fixed at ~25.5 trillion, a growth rate of 22.5 per cent over the actuals of the previous fiscal year.

According to sources in the income-tax department, direct tax collection, net of refunds, fell 5.17 per cent till the previous week of January in 2019-20. This was due to a whopping ~1.41-trillion refund.

Till that time, the government had collected ~7.32 trillion against ~7.71 trillion a year ago. The target for direct tax collection was ~13.35 trillion for FY20, which means that the government has to collect a bit over ~6 trillion in the remaining two months and a week.

With gross domestic product (GDP) growth at current prices officially estimated to fall to 7.5 per cent in 2019-20 against 12

per cent assumed at the time of the first Budget of the Modi government in its second stint and demand slowdown across sectors, goods and services tax (GST) collection has also been hit.

So far as GST collection is concerned, the government had re-set the target to ~1.10 trillion in each of the last four months of the current financial year with one of them yielding ~1.25 trillion. However, after the target was set, GST collection for December came in at ~1.03 trillion. After that, the revenue department again revised the target at ~1.15 trillion for January and February each and ~1.25 trillion for March.

The indirect tax amnesty scheme, Sabka Vishwas (Legacy Dispute Resolution Scheme), has, meanwhile, come to the rescue of the government with an additional ~38,000 crore to be added to the exchequer.

Initial expectations of the government were that the exchequer would be hit by ~1.45 trillion due to corporation tax rate cuts. But Revenue Secretary A B Pandey had kept the direct tax collection target intact at ~13.35 trillion for FY20 at his meeting with senior tax officers in December.

Experts, however, said the tax target, including that of direct taxes, would be missed. Officials too admitted it. “Ideally, the tax target for the fiscal year should be cut by ~1-1.5 trillion in the Budget,” said Madan Sabnavis, chief economist, CARE Ratings.

Rakesh Nangia, chairman of Nangia Andersen Consulting, said the Centre was looking at a shortfall in its tax collection target. “This surely leaves less room for the government to grant further tax cuts.”

The forecasting exercise for revenue targets by the government has come under the scanner of even the International Monetary Fund, which questioned the basis of the high growth projected this fiscal year despite economic slowdown.

The target for the fiscal year was revised lower by ~90,000 crore in the Budget presented in July 2019 compared to the one given in the Interim Budget presented in February of that year but it still required a growth rate of 18.26 per cent, far higher than the 8.3 per cent growth achieved in 2018-19. The FY19 saw a big shortfall of ~1.67 trillion compared to the revised estimates, the highest in several years. It was the only year since at least FY15 that the revenue projections were cut in the revised estimates, and yet the target was not met.

The demonetisation year, 2016-17, was the only year when the collection, at ~17.1 trillion, exceeded the Budget estimate of ~16.3 trillion and even the revised estimate of ~17 trillion. However, experts say the demonetisation year of 2016-17 and its following year 2017-18 should have been treated as outlier years to set targets for normal years like 2018-19 and 2019-20.

“One cannot expect the collection trend seen in the demonetisation year to continue, hence it should be taken as an outlier while doing growth projections. There were new taxpayers and people revised returns, which eventually had to fizzle out,” said a government official.

In FY19, the tax department had internally pitched for a reduction in the collection target to ~11.3 trillion from ~11.5 trillion in the Budget estimates but was instead entrusted with the task of collecting an additional sum of ~50,000 crore to spend on farmer-related welfare schemes.