Direct tax numbers to put GDP in focus
NEW DELHI: Reuters reported on Friday that direct tax collections in the current fiscal year could end up being lower than the ~11.5 lakh crore collected in 2018-19. The numbers available currently do not indicate this, but do not rule out such a possibility. Total direct tax collection in the current fiscal year up to November 2019, the latest period for which data is available with the finance ministry, was ~5.56 lakh crore, higher than the ~5.41 lakh crore up to November 2018. However, the Corporate Tax collections figure up to November 2019 was ~2.88 lakh crore, which is less than the ~2.91 lakh crore collected up to November 2018.
If the direct tax collections fall short of the 2018-19 figures — and it could, given the sharp fall in the government’s own growth estimates for 2019-2020 — this will only be the second instance of a contraction in direct collections since 1980-81, the earliest period for which data is available with the Reserve Bank of India.
Direct tax collections fell by 3.5% in 1998-99.
If direct tax mop-up fall short of last year’s figures, it merits a through examination of India’s GDP as well as direct tax buoyancy estimates. Tax buoyancy is the ratio of change in tax collections per unit change in GDP. Let’s look at these one by one. First, will tax collections come under pressure from the collapse of nominal growth? Nominal growth is growth in GDP without applying inflation adjustments.
The Indian economy is expected to grow at 7.5% in nominal terms in 2019-20. This is the slowest nominal growth rate since 1975-76. The 2019-20 Budget projected a 12% nominal GDP figure. For industry and manufacturing (a subsector of industry), nominal growth in 2019-20 is expected to be the lowest since 1960-61, the earliest period for which data is available with the Centre for Monitoring Indian Economy (CMIE) database. A 40% shortfall in nominal GDP and a collapse in taxpaying sectors means that budgeted tax collections may not materialise. .
Still, this does not justify a contraction in tax collections.
Second, could the government’s corporate tax rate cuts hurt revenue collections?
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 (RE) of ~12 lakh crore. So, prima facie, one could argue that a contraction in direct tax collections is because of the corporate tax reduction.