Union Budget: Maintaining the current high growth in direct tax collections may be a challenge next fiscal due to the impact of the high base, as well as the expected slowdown in global economic growth, said a senior government source.
“It would be difficult to maintain the current 19.5% growth rate in gross direct tax collections in 2023-24,” the source said, adding that the expected lower nominal GDP growth in 2023-24, due to a possible global recession, could impact income tax collections.
The comments come just ahead of the Union Budget 2023-24, when finance minister Nirmala Sitharaman is expected to unveil the fiscal maths including the expected nominal GDP growth rate, as well as targets for tax collections.
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It is expected that gross direct tax collections, which include personal income tax and corporate tax, are likely to exceed the conservative Budget target of Rs 14.2 trillion by at least Rs 2 trillion in the current fiscal and will help bridge the fiscal deficit of 6.4%. Collections in FY22 were Rs 14.16 trillion, much higher than the revised estimate of Rs 12.5 trillion.
Direct tax collections (pre-refunds) shot up by nearly 25% year-on-year between April 1 and January 10 this fiscal, while collections excluding refunds grew by 19.55% in the period to Rs 12.31 trillion, amounting to 86.68% of the full-year target. Of the post-refunds collections which go into the divisible tax pool, 41% is transferred to states to honour the award of the Finance Commission.
As per the first advance estimates of national income, the economy is expected to grow by 15.4% in nominal terms and at 7% in real terms this fiscal. Economists expect real GDP growth at about 6% to 6.5% next fiscal, with nominal GDP growth estimated at about 10% to 11% due to lower inflation. Consequently, a moderation in tax revenues is also being factored in, which in turn could limit the Centre’s ability to reduce the fiscal deficit sharply in 2023-24.
Rating agency Icra has projected direct tax revenues to grow by 11% next fiscal from about 18% this fiscal owing to the base effect. It expects indirect taxes to grow by 8% in 2023-24, dragged down by lower customs duty collections.
“The estimated growth in gross tax revenue for fiscal year 2024 is similar to our nominal GDP growth forecast of 10% for that fiscal, implying a tax buoyancy of about 1.0, in line with the decadal average seen during FY2010-2019. However, the growth in direct taxes is likely to outpace that in indirect taxes in FY2024, similar to the trend expected in FY202,” Icra said.
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Nomura also said that lower nominal GDP growth means lower tax collections. “The government may forecast gross tax revenue growth of 11.9% year on year in 2023-24, down from 13.8% in 2022-23,” it said in a recent note.