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Bleak math

Subdued tax revenues indicate that the economic slowdown may be more entrenched than it is believed to be

By: Editorial |
Updated: August 2, 2019 12:35:41 am
Controller General of Accounts, indias gdp growth, indian economy, india tax revenues, financial year 2019, budget 2019, The first-quarter numbers also suggest that the Centre’s tax revenues will now have to grow by a staggering 22.3 per cent in the remaining part of the year to meet the budgeted target.

Data released by the Controller General of Accounts (CGA) paints a worrying picture of the government’s finances. The Centre’s gross tax revenues grew by a mere 1.4 per cent in the first quarter of the current financial year, and are likely to be well below nominal GDP growth for the quarter. In comparison, the Union budget pegged tax revenues to grow by 18.3 per cent this year. Last year, the Centre’s tax revenues grew by 8.4 per cent (as per CGA) — below nominal GDP growth. This indicates that the trend of a rising tax to GDP ratio has been reversed. The first quarter numbers also suggest that the Centre’s tax revenues will now have to grow by a staggering 22.3 per cent in the remaining part of the year to meet the budgeted target. Though collections are likely to rise in the coming quarters, achieving this target is a tall task, especially with a more entrenched slowdown in economic activity.

The break-up of the headline tax numbers reveals that direct taxes (both corporate and personal income tax) grew at a modest 9.7 per cent in Q1, but growth was well below the budget target of 18.6 per cent. Notwithstanding sluggish economic growth which would impact corporate profitability and taxes, corporate taxes, which grew by 6.3 per cent in Q1FY20, are typically lower in the first quarter, rising thereafter. But, the impact of the lowering of tax rates on most entities, as proposed in the budget, might temper these estimates. Income tax collections have continued to grow at a healthy pace, clocking 12.3 per cent in the quarter ended June. The surcharge on the super-rich will boost collections further.

But the concern on the indirect tax side continues. Indirect taxes, excluding compensation cess and taxes of UTs, actually contracted by 4.9 per cent in Q1FY20. While part of the slippage in GST collections could be on account of IGST allocations, the slowdown in economic activity may well have exacerbated the situation. Also, compliance hasn’t really picked up as pointed out by the Comptroller and Auditor General in its audit report. Part of this shortfall could be offset by higher excise and customs collections, which will pick up in the coming quarters as the proposals mentioned in the budget are rolled out. Yet, the larger message from the tax data, of subdued economic activity, is worrying. It is possible that the slowdown is more entrenched that it is believed to be. Limited fiscal space means that monetary policy is the only game in town. But monetary policy has limited ability to stimulate growth in the short term, especially when the transmission of lower rates to the broader system remains restricted. The outlook for growth remains hazy in the near term.

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