Budget 2020: Massive tax shortfall to upset budget maths, states to be hit hard

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Published: January 29, 2020 11:25:09 AM

Union Budget 2020 India: As far as direct taxes are concerned, the Centre collected Rs 5.6 lakh crore or just 42% of the budget estimate for the whole of FY20 till November 30.

Budget 2020-21: While the Centre’s budget will take a big hit from the shortfall in the principal revenue stream, states are going to be hit equally, if not more drastically.

Budget 2020 India: The Centre is set to incur a massive gross tax receipts (GTR) shortfall of around Rs 3.5 lakh crore or nearly 15% of the Budget estimate (BE) in 2019-20, owing to a big decline in nominal GDP growth, unrealistic budget assumptions of revenue buoyancy and deep corporate tax cuts. A series of GST rate reductions, unchecked GST evasion and a dip in imports too have dented the tax kitty.

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In terms of Centre’s net tax receipts — after mandatory devolution to states from the divisible tax pool — the shortfall wou-ld be around Rs 2.45 lakh crore. Such a shortfall would be an all-time high in absolute term, for the first time in at least two decades. This financial year might also witness a year-on-year contraction in direct tax revenue.

While the Centre’s budget will take a big hit from the shortfall in the principal revenue stream, states are going to be hit equally, if not more drastically. This is because the Centre has consciously built up a buffer for itself through the mechanism of cesses and surcharges over the last few years to negate the adve-rse impact on its share of taxes from the 14th Finance Commi-ssion’s apparently liberal award to states. Also, though states are guaranteed a 14% increase in their GST revenue (S-GST), there is uncertainty over whether they will actually have this luxury, given the inadequate inflows into the compensation kitty.

As the accompanying chart shows, the states’ share of taxes in the GTR has been on the decline since the FY16, the first year under 14th FC while revenue from cesses and surcharges, which the Centre can lay hands on, has surged to significantly increase its share in GTR.

As far as direct taxes are concerned, the Centre collected Rs 5.6 lakh crore or just 42% of the budget estimate for the whole of FY20 till November 30. Considering trend of about 48% of the direct tax receipts getting collected in the first eight months and the balance in the remaining months, the direct tax shortfall against the budget estimate (BE) this year could be around Rs 1.8 lakh crore.

When it comes to indirect taxes, the biggest component of goods and services tax revenue will likely be short of the Centre’s budget estimate – including CGST, IGST and compensation fund — of Rs 6.63 lakh crore by Rs 45,000 crore. Further, the combined collections from excise and customs could fall short by Rs 1.2 lakh crore, as big contraction in imports and subdued fuel consumption have dented the collections.

According to data released by the Controller General of Accounts, the Centre’s gross taxes during April-November this year grew just 0.8% – direct taxes at 2.7% and indirect taxes at (-)0.9%. FE has learnt that by January 15, direct taxes growth on an annual basis was (-)5%.

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