Most analysts expect the nominal GDP to grow at 15% or thereabouts in FY22; going by historical pattern, it is possible that the tax revenue will grow at the same rate (buoyancy 1) or even up to five percentage points higher.
After two years of unusual negative growth, the Centre’s gross tax receipts will likely jump and register a smart growth of 15% or higher in FY22, giving the much-needed cushion to the government to continue to stimulate the recovering economy with fiscal expenditure. That in years when the GDP growth was sharper than the previous ones, the tax buoyancy usually improved – meaning tax revenue grew faster than the rate at which the economy expanded – gives credence to the assumption.
Most analysts expect the nominal GDP to grow at 15% or thereabouts in FY22; going by historical pattern, it is possible that the tax revenue will grow at the same rate (buoyancy 1) or even up to five percentage points higher. That probably means the sharpest annual growth in tax revenue since FY11, when it was a robust 27%.
Samiran Chakraborty, chief India economist at Citi Group, said given the unprecedented Covid-induced downturn in FY21, a better way to look at FY22 tax growth is to compare it with the FY20 level. The tax revenue growth in FY22 over FY20 could be about 10% and the nominal GDP growth could also be of almost an equivalent proportion. Moreover, if the excise duties on fuels are excluded, the tax-to-GDP ratio in FY22 will still be lower than the pre-crisis level. “Our equity strategists are looking at an EPS growth of 35% in FY22. Against that, about 25% corporate tax growth (year-on-year) next fiscal doesn’t seem to be out of place,” he said.
Sajjid Chinoy, chief India economist at JP Morgan, also said given the current circumstances, more than buoyancy, a better way would be to look at the tax-to-GDP ratio. “If I adjust for excise duties (hikes in rates on fuels) and the corporate tax cuts, over the last two years, gross tax-to-GDP ratio has fallen by over 1.5 percentage points because of the downturn,” he said.
“When you get an upturn (in FY22), you are going to recover some – we are building in 0.8% of GDP. That translates into a 27% growth ex-excise. So, don’t be surprised at all if, given the depressed base, on a nominal GDP growth of 15%, you might get a 27-28% rise in gross taxes in FY22,” Chinoy added.
Tax revenue being highly elastic to GDP growth is a proven notion, which is belied only when the substantial cuts in tax rates are undertaken. A case in point are the years 2008-09 and 2009-10, when taxes were slashed as part of the stimulus package, announced to counter the effects of global financial meltdown.
What also increases the chances of a tax buoyancy greater than 1 in FY22 is augmented ‘tax effort’, meaning a crack down on evasion via increased use of sophisticated data analytics. The GST data base is increasingly facilitating efficient detection of evasion of even income taxes by firms and individuals.
Also, enabled by the hefty hikes in the assorted excise rates on auto fuels from October 2019 through May 2020 – the cumulative tax rate on diesel in FY21 was more than double the level in FY20 –, the Centre could net a tidy sum of Rs 1.2 lakh crore or more in FY22 over FY20 level as additional gross revenue from auto fuel taxes. The Centre’s revenue from taxes on petrol and diesel, before devolution to states, surged 40% to Rs 1.31 lakh crore even in the pandemic-hit first half the year, which saw sales of the two auto fuels dip 24% on year.
Since a large part of the extra taxes on auto fuels are not shared with states, these imposts will benefit the Union budget in a more pronounced manner than taxes in the divisible pool.
It is unlikely that the finance minister will give out tax breaks, at a big cost to the exchequer in the coming Budget.
Demonetisation bolstered the direct tax assessee base and improved the tax’s buoyancy to a great degree in FY17 and FY18, but the slump in economic growth and a return to old, evasive habits by sections of taxpayers led to a sudden, precipitous erosion of these gains in FY19 and FY20. And the pandemic has dealt a body blow to the tax revenue in FY21 – an unprecedented rate of contraction is set ti be registered, even though it could be a bit narrower than (-)13% registered in April-November.
FY19, FY20 and FY21 are also proof that the tax revenue usually falls sharper than the rate at which economic growth declines. Of course, the decline in tax revenue witnessed in FY20 could also be attributed in good measure to the steep corporate tax cut.
An aspect to be noted is that the demonetisation’s positive impact was visible on personal income tax immediately, that is, in the year in which the measure was implemented, but it boosted the corporate tax assessee base and the corporate tax revenue mainly in the subsequent year. Direct tax buoyancy reached a temporary peak in 2018-19 and has since fallen; the buoyancy fell into an abyss in FY20 itself. Tax effort has helped a lot in FY21, in the absence of which, the revenues could have fallen even sharper in the year.
The Centre’s gross tax receipts fell from Rs 20.8 lakh crore in FY19 to Rs 20 lakh crore in FY20. Assuming a decline of 5%, the receipts in FY21 are seen at Rs 19 lakh crore. Finance secretary Ajay Bhushan Pandey is on record to state that the gross tax receipts this year will be “close to last year’s level”.