Given this year’s GDP growth was always expected to be lower than FY17’s 7.1%, finance minister Arun Jaitley did well to keep a lower tax growth target, of 12.2% for the year. While Jaitley expected a windfall from demonetisation from those who brought back their black money into the system—recall the press releases on notices that had been sent to ‘suspicious’ deposits—and so budgeted a growth of 24.9% in personal income taxes, data for the first eight months suggests this didn’t happen. If personal income taxes haven’t grown at the expected levels, this means that taxpayers have shown significant expenses to set off the extra incomes they disclosed after demonetisation. Personal income tax collections from April to November 2017 grew a mere 15.3%, to Rs 215,183 crore, compared with Rs 186,675 crore in the same period the year before. But, making up for this, corporate tax collections grew by 12.4% in the April to November 2017 period as compared to the 9.1% budgeted for the full year—by November 2017, these rose to Rs 249,829 crore over Rs 222,258 crore by November 2016. Taken together, direct taxes grew 13.7% in the April to November 2017 period as compared to the budget’s 15.7% target, so the government will most likely meet its target given the faster growth in the last quarter of the year.
There will, however, be a problem when it comes to indirect taxes. While the central government was targeting collections of Rs 927,000 crore from indirect taxes in FY18, it collected Rs 176,000 crore in the pre-GST April-June 2017 period; based on the average collected in the July to November period, this will yield a tax for nine months of Rs 240,000 crore—it could be higher if the earlier (pre-demonetisation) trend of significantly higher revenues in the last quarter continues this year as well; with the economy quite sluggish, however, it is not clear how much will happen this year. Based on monthly GST collections of around Rs 95,000 crore, this means the Centre gets Rs 427,500 crore, leading to an overall shortfall in indirect taxes of around Rs 85,000 crore. But since the Centre gets to keep IGST revenues, it can account for the undistributed part of this in its tax revenues, keeping the tax shortage to a minimum. Since the state governments have been promised compensation on the basis of a 14% implicit revenue growth, however, their GST collections will be very healthy in FY18, indeed, much over the year’s target—at a macro level, that means while a higher central government borrowings may cause bond yields to rise, lower borrowings by states will keep yields in check.