If buoyancy doesn’t improve — it likely won’t — growth slump to depress FY21 gross tax by a massive Rs 2.2 lakh crore
When the Centre assumed tax buoyancy of 1.2 for FY21, as against just 0.5 seen in FY20 (revised estimate), many thought that it was optimistic, if not unrealistic. However, given the spread of Covid-19 and its impact on domestic and global demand, India’s economic growth could fall considerably from the budgeted level.
Assuming the actual nominal GDP growth for FY21 at 8% as against the budgeted 10%, the tax buoyancy required to achieve the budgeted growth in gross tax receipts (GTR) of 12% will be an impossible 1.5. Put differently, even if the assumed tax buoyancy of 1.2 holds true, the lower GDP growth would result in a tax revenue (GTR) shortfall of Rs 1.5 lakh crore next fiscal, from the budgeted Rs 24.2 lakh crore. Of course, since the buoyancy budgeted is really high under current circumstances, the GTR shortfall will likely be far higher.
Supposing the buoyancy in FY21 to be 0.5, the same level as in FY20, and nominal GDP growth at 8%, the shortfall from the budgeted gross tax receipts in FY21would be a massive Rs 2.2 lakh crore. This is indeed a de-stabilising prospect for the Centre’s Budget and fiscal consolidation plans. Alas, it appears to be realistic at this point of time, as Covid-19 is playing havoc across the world, constricting demand and disrupting supply chains.
Whatever ‘tax effort’ the government might bring in, the buoyancy or the government’s revenue-generating capacity will likely remain constrained in a stultified economy.
Worse, the FY21 GTR target would look even more challenging given a likely shrinking of the FY20 base by at least 6% from the budgeted level. As for FY20, the government’s best hope is that a tidy sum would be collected by March 31 under the so-called Vivad Se Vishwas scheme for resolution of direct tax disputes. Also, some Rs 30,000 crore (gross) is likely to be raised this fiscal from the scheme implemented for resolving indirect tax disputes (see the story beside this).
The GTR growth targeted for FY21 is 12%, as against 4% (RE) in FY20 and 8.4% growth achieved in FY19. The Centre’s tax buoyancy dropped from 1.5 in FY17 to 1 in FY18 and further to 0.7 in FY19 and 0.5 (RE) in FY20. The FY20 buoyancy could be even lower given the shortfall in receipts being witnessed.
Amit Maheshwari, leader of international tax practice at Ashok Maheshwary & Associates said: “The impact of pandemic would result in closing down of businesses and massive lay offs. In these conditions, the government would be well advised to focus on providing a fiscal stimulus, not stick to prescribed fiscal deficit as revenue collection is sure to fall short of target next fiscal.”
“In normal circumstances, the government focuses on collecting taxes and making social/ infrastructure spending with such expenditure. However, in the heat of the disruptions by the pandemic, it is equally important to provide relaxation to the taxpayers who are already facing the heat by reduced business activities,” Shailesh Kumar, director at Nangia Andersen Consulting said.
He added that government may also take several steps including monitoring the payment of advance tax by top taxpayers, early disposal of applications under the Vivad se Vishwas Scheme to maximise tax collections under the scheme.
Vishal Raheja, DGM, Taxmann, said: “At this juncture, it is difficult for any agency to quantify the adverse impact of the Covid-19 calamity on the Indian economy. The Economic Survey for 2019-20 forecast growth of 6-6.5% for next year, which seems to be hard to achieve in the current situation. Undoubtedly, there is need of swift fiscal-monetary response to revive the crippling economy.”
“Recently, the government decided to not pass the benefit of slump in international oil prices and hike excise duty on petrol and diesel which would certainly help to increase revenue collections. The government should raise import duty on non-essential commodities and there could be levy of additional cess on luxury items for healthcare infrastructure, similar to health and education cess in Income-Tax laws. This cess would raise revenue collection and provide adequate fund for required infrastructure facilities,” Raheja opined.