On tax revenue growth exceeding the overall economic performance, Bajaj said a combination several factors including a trend towards greater formalisation – and much better compliance were boosting the revenues.
Even as ‘all companies’ affected by retrospective taxation are ‘positive’ about settling their disputes under the special dispensation offered by the government, the Centre would secure indemnity covers from them in the cases where all ‘separate interested parties’ have not given undertakings to cease litigation after the disputes are settled, revenue secretary Tarun Bajaj told FE. Cairn Energy – the government had raised 98% of over Rs 8,100 crore collected as retrospective taxes from the Scottish energy firm – was on board to resolve the tax dispute, he said.
On most state governments likely facing a revenue shock due to the scheduled expiry of the GST compensation period on June 30 next year, the official pleaded an absolute absence of resources for extension of the mechanism, but said augmentation of GST revenues through rationalisation of the rates structure and improved compliance would likely ameliorate the situation. “Where is the money? The cesss proceeds till March-end 2026 are required to finance the (special loan facility) for the shortfall in FY21 and FY22”, he said.
The GST compensation mechanism ensures 14% annual revenue growth for states for five years through June 2022. The designated cess fund fell way short of the required level in FY21 and is seen to face a huge shortfall in the current financial year as well. All states are looking for an extension of the cover.
Bajaj expressed the confidence that the Centre’s gross tax-to-GDP ratio would improve to a healthy 12% of GDP in the medium term (it was just 10% in FY21) and tax buoyancy would be over 1% from the current financial year onward. Higher revenues for the Centre would enhance devolution to states, he noted.
On tax revenue growth exceeding the overall economic performance, Bajaj said a combination several factors including a trend towards greater formalisation – and much better compliance were boosting the revenues. While many analysts believe the formalisation process that eliminated thousands of informal-sector units has been a forced one and could be a drag on growth, the revenue secretary has a more nuanced view. “Had it been only formalisation, personal income tax wouldn’t have grown by 62% on year to Rs 2.88 lakh crore till September 23 (this fiscal). It is far higher than normal growth which is 10%.” “We have collected a lot of information (on likely income profiles based on spending patterns and sales) about the taxpayers, and are playing it back to them, making them voluntarily pay the (full) taxes. We have ensured better compliance,” he said.
Bajaj said the gross tax collections would exceed FY22 budget target of Rs 22.17 lakh crore. Separately, another official had told FE that the Centre’s net tax collections could exceed budget target by about Rs 2 lakh crore in FY22, largely covering the additional fiscal cost of stimulus measures announced by the government so far.
On the agenda before the two groups of ministers set up by the GST Council for laying the road map for revenue augmentation, the secretary said: “So many issues need to addressed such as correction of inverted duty structure, (minimising) exemptions, moving some commodities to a different slab and compliance issues. It’s not that from 11% (current revenue neutral rate), the RNR will straightway be increased to 15% or so. That may not be the best solution. All issues are on the table and it is for the GoMs to pick them up in their wisdom.
According to Bajaj, an expansion of the GST taxpayer base helped boost direct taxes too. “Since GST information is shared with the income tax department, it is difficult for taxpayers to evade or underpay taxes. There are as many as 1.3 crore GSTINs (the unique number assigned to each taxpayer) now, up from 60 lakh in 2017, when the GST was launched.”
The GST Council, as it met in Lucknow on September 17, set up two groups of state finance ministers: one to look at ‘rationalisation’ of the rate structure and another to deal with compliance and technology issues, reflecting the urgency felt by the council to bolster the revenues.
Gross tax revenue in the first four months of this fiscal surged 29% even over the pre-Covid (same period in FY20) level. If this pace of growth (over FY20) continues throughout this fiscal, gross tax collection will rise to Rs 25.93 lakh crore in FY22. It will drive up the tax-to-GDP ratio to 11.6% in FY22, the highest since FY08, far exceeding the budgetted level of 9.9%. This, of course, assumes that the nominal GDP for this year will touch the budgetted level of Rs 222.87 lakh crore, recording an annual expansion of 12.9% upon the provisional estimate for FY21. Tax buoyancy, too, will shoot up to as high as 2.2 in FY22.
Bajaj said the government received positive feedback to the draft rules to settle retrospective tax disputes for indirect transfer of Indian assets and the final rules would be published soon.
As per the draft rules, in order for the government to revoke the tax demand and refund the amounts collected sans interest, the party concerned not only have to withdraw all pending litigation in domestic courts and arbitration under bilateral investment treaties filed abroad, but also ensure that cases filed by any ‘separate interested parties” including beneficial owners are withdrawn. This would mean that Vedanta has to undertake to withdraw the arbitration filed under India-Singapore tax treaty for Cairn Energy to avail of the facility offered by New Delhi. Vedanta has sought compensation close to Rs 5,000 crore for significant decline in share value owing to the Rs 10,250 crore tax notice to Cairn’s the then subsidiary Cairn India. Cairn India later merged with Vedanta.