A slowing economy has taken its toll on the government’s tax revenues. Advance tax collections have grown by a mere 6 per cent between April to mid-September this year, as against a growth of 18 per cent over the same period last year. Within direct taxes, corporate tax collections have grown by just 6.5 per cent over the period, while personal income taxes have grown by a mere 3.5 per cent over this period, lower than even the nominal GDP growth of 8 per cent in the first quarter of 2019-20. With direct tax collections now having to more than double over the next six-odd months to meet the budgeted target of Rs 13.35 lakh crore, a slowing economy will exacerbate the situation: The Centre will find it difficult to meet the fiscal deficit target of 3.3 per cent of the GDP this year.
There is concern on the indirect tax side too. A slowdown in consumption — private consumption grew by just 3.1 per cent in the first quarter of 2019-20 down from 7.2 per cent in the previous quarter — will further drag down the goods and services tax (GST) collections. By some estimates, the required monthly run-rate for GST collections has already jumped to around Rs 1.18 lakh crore per month for the rest of 2020. Achieving this, with consumption sputtering, will be challenging. But it isn’t just the Centre alone. State finances will also be under pressure this year. First, subdued tax revenues mean that the divisible tax pool, 42 per cent of which is shared with states, will be lower than what has been budgeted for, reducing tax devolution to states. Second, last year, devolution to states was carried out on the basis of the revised revenue estimates of 2018-19 presented in the Budget. But actual tax collections, as per the Controller General of Accounts, were significantly lower. This implies that devolution to states last year may have been higher than what was required. It is possible that this adjustment is being undertaken in the current financial year which will further reduce tax devolution. Then, there are also concerns that revenue collected through the compensation cess may not be enough to compensate states this year.
Part of the shortfall in the Centre’s tax revenue this year will be made up by the RBI transferring Rs 58,000 crore more than what was budgeted for. But this alone may not be enough. One option before the Centre is to ramp up its stake sales in PSUs. While the government has budgeted to collect Rs 1.05 lakh crore through disinvestment this year, it could opt for a more aggressive disinvestment/privatisation programme to alleviate fiscal concerns, while generating resources to ramp up its capital expenditure.