Corporate tax largesse upsets fiscal maths

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Updated: September 21, 2019 5:40:16 AM

Fiscal deficit being a percentage point of nominal GDP, a lower GDP number would push up the deficit number even if the absolute fiscal deficit number remains unchanged from Budget estimate level.

corporation tax rate, corporation tax cut, corporate tax, corporate tax rate, corporate tax in india, corporate tax rate india, Narendra Modi, nirmala sitharaman, financial express, financial express opinion, corporate tax rate 2019, fiscal mathAccording to the revised road map, the fiscal deficit was to be reduced from 3.4% in FY19 to 3.3% in FY20 and further to 3% in FY21.

The Centre’s massive Rs 1.45 lakh crore per annum tax foregone due to reduction in corporate tax rates may widen its fiscal deficit by 69 basis points to about 4% in FY20, ceteris paribus. Even though the Centre has received additional Rs 58,000 crore surplus from the Reserve Bank of India for FY20 than factored in the Budget, more headwinds are also emanating from a likely lower nominal Gross Domestic Product (GDP) shortfalls in tax receipts (even in the usual scenario) and a lack of headroom to compress spending.

Unless the Centre rolls over some payments, such as subsidies, to the subsequent years or resorts to additional Extra Budgetary Resources (EBRs) through PSUs, the Centre’s fiscal deficit may rise to over 4% in FY20 as it might be forced to rely more on borrowings to keep up the public spending momentum.

According to the revised road map, the fiscal deficit was to be reduced from 3.4% in FY19 to 3.3% in FY20 and further to 3% in FY21. The road map will likely have to be redrawn.

Although, lower tax rates might lead to more compliance and improvement in tax collections, those won’t be enough to cover the revenue foregone. “We are conscious of the impact of the tax rate cuts on the fiscal deficit.

“We will be taking all of that on board to reconcile as to how the situation is now and how we want to take it forward,” finance minister Nirmala Sitharaman said.

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The Centre’s direct tax collection is already lagging the Budget target. In April-July, the year-on-year growth in direct tax collection was just 5.7%, even as the required rate to achieve the Budget target for FY20 is over 17%.

The Centre’s net tax receipts (direct and indirect taxes after devolution to states) grew by 15.8% in the first four months of this year as against a required growth rate of 29.5% to meet the Budget target for this year. The Goods and Services Tax (GST) also did not bring the widely expected acceleration in revenue growth; though the GST rates on most items were lower than the combined Centre-state rates at which these were taxed in the pre-GST period and tax base doubled.

Nominal GDP growth of 8% in Q1FY20 indicates that it is likely to be lower than 12% factored in the Budget for the full year. Fiscal deficit being a percentage point of nominal GDP, a lower GDP number would push up the deficit number even if the absolute fiscal deficit number remains unchanged from Budget estimate level.

All these indicate that the government would struggle to stick to the FY20 expenditure estimate of `27.84 lakh crore, up 20.5% year-on-year. To contain fiscal deficit, it had pruned spending by `1.3 lakh crore or 5.4% of BE in FY19. However, the gap spending was made up through EBRs last year.

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