1. Demonetisation or GST bonanza? Finance Ministry projects 11.9% tax-to-GDP growth in FY20

Demonetisation or GST bonanza? Finance Ministry projects 11.9% tax-to-GDP growth in FY20

On the face of things, if the government is able to achieve its FY20 tax-to-GDP target of 11.9%, up from a projected 11.3% for FY18, this will be nothing but going back to the levels achieved way back in FY08.

By: | New Delhi | Published: August 12, 2017 5:35 AM
modi, narendra modi news, demonetisation, gst, goods and services, demonetisation news, finance ministry, gross domestic product, gdp, narendra modi, arun jaitley, economy, india economy The biggest contributor to the FY15-FY17 increase was excise duty which, as a share of GDP, rose from 1.5% to a whopping 2.6%. (Reuters)

On the face of things, if the government is able to achieve its FY20 tax-to-GDP target of 11.9%, up from a projected 11.3% for FY18, this will be nothing but going back to the levels achieved way back in FY08. Within two years of this, however, tax-to-GDP levels were down to 9.6% and then stabilised at around 10% from FY10 to FY15. What makes the FY20 target creditable is the fact that this is to be achieved while GDP growth is not expected to accelerate the way it did in FY08. While nominal GDP growth is projected to rise to 12.3% in FY20, it had shot up to 16.1% in FY09. To get a sense of what higher GDP growth does to tax collections, keep in mind that corporate tax-to-GDP was 3.9% in FY08 and excise taxes were 2.5%—in FY15 when GDP growth was much slower, these fell to 3.4% and 1.5%, respectively. Even without demonetisation and GST, past trends would suggest finance minister Arun Jaitley will find it easy to meet his targets—the tax-to-GDP ratio rose from 9.8% in FY15 to 11.1% in FY17.

Some part of this jump is due to personal income tax collections rising with more attention being paid to getting taxpayers to e-file their returns which allows computers to do a lot of the matching that the taxman may not be able to catch—as a share of GDP, personal income tax collections rose from 2.1% of GDP in FY15 to a likely 2.6% in FY18. Part of this will be the demonetisation dividend with more people coming into the tax net due to it, but it is important to put this in perspective. The Economic Survey released on Friday does this by subtracting the normal increase in the number of taxpayers from the ones that came during the post-demonetisation period, and concludes that about a third of the increase was due to demonetisation—the extra income they have declared is a mere Rs 10,500 crore, or an amount which doesn’t even get most into the tax bracket. So, the demonetisation dividend is not as great as made out.

The biggest contributor to the FY15-FY17 increase was excise duty which, as a share of GDP, rose from 1.5% to a whopping 2.6%. As global oil prices collapsed, finance minister Arun Jaitley didn’t pass them on to consumers but chose to mop up the lion’s share through massive hikes in petroleum excise. Naturally, this can’t be repeated again unless there is another collapse in crude prices which seems unlikely. In which case, the big jumps over the next few years have to come from GST, after accounting for the fact that the petroleum bonanza is over. Whether that can happen so fast needs to be seen, but there can be no doubt just automatic matching of invoices filed will boost compliance—as and when the number of rates gets reduced, and the taxes lowered, this should help more; 16 lakh more businesses have registered themselves under GST, suggesting compliance will improve. Higher GST compliance will also boost income tax collections since a businessman declaring a much higher turnover will find it difficult to continue to show low personal incomes—the fact that the taxman’s 360o profiling software, Operation Insight, will be up and running soon will also help get more personal income tax collections.

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