Collections may moderate in H2: Gross tax revenues to overshoot FY23BE by Rs 3 trn

Conservative BE & inflation behind extra receipts, rather than buoyancy

Collections may moderate in H2: Gross tax revenues to overshoot FY23BE by Rs 3 trn
Net (post-devolution) tax revenue for the Centre could be around Rs 1.5-1.7 trillion higher than the BE of Rs 19.3 trillion.

The Centre’s gross tax collections this year could turn out to be about Rs 3 trillion higher than the budget estimate (BE) of Rs 27.6 trillion, but the higher mop-up would largely be due to very conservative (near flat) growth assumed in the Budget and elevated inflation, rather than high buoyancy.

Tax buoyancy – growth in collection against the nominal GDP expansion – in FY23 could be around 1, much lower than an impressive figure of 1.71 achieved last year. The jump in buoyancy last year was on the back of sharp improvement in compliance and the economy’s recovery from the trough caused by the pandemic.
Of course, the tax buoyancy was a dismal 0.79 in pre-pandemic FY19.

Net (post-devolution) tax revenue for the Centre could be around Rs 1.5-1.7 trillion higher than the BE of Rs 19.3 trillion.

These estimates factor in a likely moderation in year-on-year growth in receipts in the second half FY23.

According to the RBI estimate, CPI inflation is projected to average 6.7% in FY23 compared with 3.4% in FY19 and 5.5% in FY22.

The gross tax revenue (GTR) may be around Rs 30.5 trillion in FY23, Rs 2.9 trillion or 10.5% more than the BE as the goods and service taxes (GST) and direct taxes are expected to substantially overshoot the respective BEs. Year-on-year, the GTR growth seen to be about 12.5%, almost at par with likely nominal GDP growth.

The sharp year-on-year increase seen in direct tax collections in the initial few months in the range of 25-30% got corrected recently, possibly due to moderation in corporate earnings amid external headwinds to economic growth. This was evident from advance tax collections growth falling to a little over 10% in the September quarter from 33% in the previous one.

Direct Tax collection, net of refunds, stood at Rs 7.45 trillion as on October 8, up 16.3% on year; this is 52.46% of the FY23BE.

Assuming the direct tax collections maintain 16% growth for the full year, the collections could be Rs 2.3 trillion more than FY23BE of Rs 14.2 trillion. Of course, revenue secretary Tarun Bajaj recently said the tax department is aiming for a robust 30% growth on year as far as direct taxes are concerned.

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If direct tax collections grow by 30%, it could fetch Rs 4.25 trillion additional revenue (before devolution). Post 41% devolution, the Centre could garner around Rs 2.5 trillion, offsetting bulk of the Rs 2.8 trillion additional subsidy expenditures on food, fertilisers and fuels, in FY23.

However, analysts are skeptical about such a growth in direct tax collections in FY23.

“Direct tax collections buoyancy may come down in the second half of the current fiscal compared with the first half due to economic growth slowdown, but in totality the collections will be higher than BE,” India Ratings chief economist DK Pant said.

Average monthly GST collections rose to Rs 1.49 trillion/month in the first five months of the current financial year compared with Rs 1.23 trillion/month in full FY22. According to Icra chief economist Aditi Nayar said Central GST inflows are likely to exceed the FY23 target by around Rs 1.4-1.5 trillion.

“We estimate non-excise gross tax revenues to exceed the BE by Rs 3-3.5 trillion. Of this, approximately Rs 1 trillion will be shareable with the states. However, the shortfall on account of the excise duty cut, which is not shareable with the states, is approximately Rs 0.9 trillion. Thus the net upside is likely to be Rs 1-1.5 trillion,” Nayar said.

Pant said GST collections growth will likely moderate in the second half of the of FY23 as inflation is seen moderating from now till end of the year due to measures taken by the RBI and the government.

However, higher GST collections should not be construed as an indication of a rise in consumption demand. In real terms, private final consumption expenditure (PFCE; proxy for consumption demand) in 1QFY23 grew 9.9% over 1QFY20, but in nominal terms it grew 36% during the same period. The real and nominal GDP during the same period grew 3.8% and 31.4%, respectively. “This clearly suggests the surge in GST collections is more due to the higher inflation than higher consumption,” India Ratings said in a note.

While excise duty cut in on petrol and deisel in May may lead to a revenue loss of Rs 0.9 trillion in FY23, thereby a shortfall from the budgeted level, customs duty collections are seen broadly achieving the target for the year.

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First published on: 14-10-2022 at 02:30:00 am