Opinion How falling rupee takes its toll

Rupee depreciation is set to hit the government’s revenue collection,after claiming the usual victims including importers,FMCG products,the auto sector and foreign travellers. Around 40 per cent of direct tax collection comes in the form of advance tax,paid largely by corporates. However,profitability of corporates is likely to be further hurt due to the depreciation of rupee. To get a sense of the impact of high borrowing cost,according to an RBI report,corporate investment intentions remain subdued,with the aggregate project cost envisaged from new projects (for which assistance was sanctioned by banks) in 2012-13 was Rs 2 trillion,almost equal to that in 2011-12,at Rs 1.9 trillion. Sales also declined in Q4 of 2012-13,more so in the auto sector,electricity generation and supply,iron and steel and real estate.

Many corporates import raw materials including engineering items,gems and jewellery,coal,and oil for manufacturing,making the payment in dollars. The fall in rupee’s value would mean more pay-out,leading to an impact on bottomlines. India Inc paid advance tax worth Rs 92,115 crore (gross) during the April-July period as compared to Rs 83,932 crore in same period last year,up 9.75 per cent against asking rate of 17 per cent to meet the budgetary target. The government aims to collect Rs 3,76,782 crore from corporation tax alone,of the total direct tax collection target of Rs 6.68 lakh crore. Further,the earnings from the exchange rate for corporates would be set off by the currency depreciation. Government,though,may hope to gain more from customs side given dearer imports. However,with the measures to curb gold import showing result,overall imports grew only 2.82 per cent,not leaving much scope for earning from imports.

Advertisement

For individuals,the depreciation would not impact the tax payment pattern much unless the investments are being diverted to unproductive assets like gold. The tax collection so far has not been very encouraging with the indirect tax mop up inching up only 2.9 per cent in the April-July period while net direct tax collections growing by 10.37 per cent during the period. However,given the fact that liquid funds are giving a return of over 9 per cent per annum,corporates might prefer to lock their money in form of high advance tax payment where they will generate a better rate of return,12 per cent per annum on the refunds,as compared to the liquid funds.

Shruti is a senior correspondent based in New Delhi shruti.srivastava@expressindia.com