Demonetisation: Arun Jaitley cites tax growth in wake of note ban to counter critics

By: | Published: January 10, 2017 7:11 AM

Even as anecdotes and random surveys suggest large-scale job losses and decline in revenues of firms following the demonetisation move, the government’s tax numbers largely say a different story.

Finance minister Arun Jaitley said the Centre’s direct tax collection was up 12.01% at R5.53 lakh crore in April-December 2016 compared with the revenue in the year-ago period, while indirect tax receipts soared 25% to Rs 6.3 lakh crore. (Reuters)Finance minister Arun Jaitley said the Centre’s direct tax collection was up 12.01% at R5.53 lakh crore in April-December 2016 compared with the revenue in the year-ago period, while indirect tax receipts soared 25% to Rs 6.3 lakh crore. (Reuters)

Even as anecdotes and random surveys suggest large-scale job losses and decline in revenues of firms following the demonetisation move, the government’s tax numbers largely say a different story. Tax collections of the Centre and many states haven’t lost much pace during November-December, the cash-crunch period. Companies, traders and individuals revealing their concealed incomes, the use of demonetised notes for payment of taxes and utilities and increases in the excise duties on petroleum products could be part of the reason for the sustained tax buoyancy.

Finance minister Arun Jaitley said the Centre’s direct tax collection was up 12.01% at R5.53 lakh crore in April-December 2016 compared with the revenue in the year-ago period, while indirect tax receipts soared 25% to Rs 6.3 lakh crore. That means the direct tax collections have kept pace with the Budget target of 12.6% growth for FY17 in the first nine months of the financial year, while indirect tax mop-up far exceeded the modest 10.8% annual growth target.

In December 2016, the month that experienced the inadequacy of replacement currency the most, indirect tax collections saw a 14.2% growth over December 2015 and 12.8% growth over November 2016, Jaitley said.

Excise revenue in December 2016 was up 31.6% annually, quite at odds with the fact that manufacturing activity, gauged by the Nikkei Purchasing Managers’ Index (PMI) survey, contracted for the first time in a year in the month as demonetisation curbed new orders as well as output of companies. The headline manufacturing PMI touched 49.6 in December, compared with 52.3 in the previous month.

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Excise collection was up 43% at R2.79 lakh crore in April-December this fiscal, while service tax revenue rose 23.9% to R1.83 lakh crore. Customs duty receipts were up 4.1% at 1.67 lakh crore in the first nine months of this fiscal year, even though in December it saw 6.3% decline owing mainly to the post-demonetisation fall in gold imports.

In December 2016, the service tax growth was recorded at 12.4%, somewhat reflecting a slowdown in the sector. The seasonally adjusted Nikkei India services business activity Index posted 46.8 in December and 46.7 in the previous month, indicating broad-based output contraction.

As for the direct taxes, gross corporate tax collections in April-December was up 10.7% in April-December this fiscal over the year-ago period while personal income tax (PIT) revenue (including securities transaction tax) saw a growth of 21.7%. After adjusting for refunds, the net growth in corporate tax was just 4.4% (against the budgeted growth for FY17 of 9%), but net PIT mop-up was a robust 24.6%. And refunds haven’t slowed down either: R1.26 lakh crore was released as direct tax refunds in April-December this fiscal, up 30.5% over the year-ago period. Analysts reckon the pay commission award has contributed to the robust PIT growth.

The fact that tax revenues haven’t taken a major hit augurs well for the government with an obligation to step up spending to offset the impact of demonetisation on the economy — the advance estimate of national income released by the Central Statistics Office last week factored in a 23.8% jump in government final consumption expenditure to project a GDP growth rate of 7.1% in FY17.

However, a broad-based recovery of the economy will hinge on how the private investments and consumption are going to pick up in the coming months supported by the recent reductions in bank lending rates. Banks’ credit growth, at multi-year lows for quite some time, hit a 62-year trough of an annual 5.1% in the fortnight through December 23, according to SBI chief economist Soumyakanti Ghosh. This is despite the fact that banks were flush with funds following demonetisation.

While many states like West Bengal and Kerala have said their VAT collections have taken a hit due to demonetisation and demanded that the Centre enhance the goods and services tax compensation, Jaitley said that after the note ban VAT revenues have “increased for most states”. He also noted that while the facility for depositing VAT in old currency was there, 99% of the central taxes were paid in digital mode.

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