Missing tax filers: Revenue collections corroborate slowdown in economy

Updated: May 6, 2019 7:01:52 AM

The Centre must look at further expanding the tax base (optimally using the data repository from demonetisation and GST). Without a significant improvement in the tax base, the medium-term growth path will be at risk.

Missing tax filers, tax filers, Tax collections, economy, indian economy, demonetisation, GST, financial express, opinionMissing tax filers: Tax collections corroborate slowdown in economy

By Suvodeep Rakshit, Upasna Bhardwaj & Avijit Puri

We are surprised with the decline in income tax e-filing in FY19—a first in the recent history of tax filings. If the filings are indeed plateauing, it will be a worry for the fiscal which has seemingly shifted its focus to compensatory expenditure. The Centre must look at further expanding the tax base (optimally using the data repository from demonetisation and GST). Without a significant improvement in the tax base, the medium-term growth path will be at risk.

Based on the e-filing website of the income tax department, returns filed in FY2019 were at 66.8 mn against 67.5 mn in FY2018—1% lower. This is surprising given that post demonetisation it was expected that the tax base would continue to increase. It does beg the question whether compliance was weaker in the latter part of FY2019 given that the number of registered filers has continued to see steady growth. If compliance has been weak, the new government will aim at increasing the filings and collections in FY2020.

One of the positives out of the filing data has been the steady increase in the share of filers in the `0.5-1 mn, away from the `0.5 mn bracket. A similar (though quantitatively lower) trend is seen in the `1-5 mn brackets too. A focused utilisation of the data on deposits during demonetisation could yield better compliance, especially in the higher income brackets. This, combined with the granular GST-filing data, will be essential in increasing the filings as well as revenues over the next few years. The task is cut out for the next government looking at improving the tax buoyancy—essential to fund the increasing transfers in expenditure.

While we hope that the filings for the assessment year increase (around August when filings are completed), a relatively muted tax filing growth will create further headwinds in an already stressed fiscal space. With the recent inception of direct transfers in the budget, the fiscal could easily be on a slippery slope unless there is a rationalisation of expenditure. We note that around 55% of central government expenditure is fixed in nature and the eventual impact could be on further lowering capex. Given the stressed fiscal space, the debt markets are burdened with heavy government and PSE borrowings, which is likely to keep the yield curve steep in FY2020E.

While a number of activity indicators have been signaling a slowdown in parts of the economy, the tax collections corroborate it too. Aggregate indirect tax revenues’ buoyancy has been weak along with targets being missed on direct taxes too. Further, persistently high borrowing cost for financial institutions and companies (given crowding out by the government sector) will weigh on the near-term aggregate demand in the economy.

From a medium-term perspective, if the government doesn’t expand its capex (higher transfers and muted tax growth), growth prospects will be under doubt given estimated fiscal multipliers. Further, the drag from the government on the savings also needs to reduce to create space for higher investment rate without impacting macro balances. With a more moderate fiscal policy, an investment-led growth (and a lower consumption rate) will be essential to keep the savings-investment gap in check.

Authors are with Kotak Economic Research
Edited excerpts from Kotak Economic Research’s Public Finance Update dated April 30

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