Lower tax collection will mean lower resources to be disbursed to states, and will be a major factor in the 15th FC’s decision on what the devolution to the states should be set at for the five-year period
starting April 1 next year.
According to Union Budget FY20 documents, the gross tax revenue
estimate for the year is Rs 24.6 trillion, and the net-to-Centre tax revenue estimate stands at Rs 16.5 trillion. This means the amount due to the states in the form of devolution, goods and services tax
(GST) compensation, share of integrated GST
and other items, is around Rs 8.1 trillion.
If gross tax revenue falls short by around Rs 2 trillion and comes closer to Rs 22.6 trillion, net-to-Centre tax revenue will be around Rs 15.1 trillion.
If all other revenue and expenditure items remain the same, this could take the fiscal deficit for FY20, as a percentage of GDP, to 4 per cent, compared with the budgeted target of 3.3 per cent.
It should be noted that lower gross tax revenue is anticipated, even though the Centre is hoping that growth will pick up in the latter half of the year. While the FY20 Budget assumes 12 per cent nominal GDP
growth over FY19, April-June nominal GDP
growth came in at 8 per cent, the lowest since the third quarter of 2002-03. Real GDP
growth for the quarter was 5 per cent — the lowest since 2013.
Direct tax collection has seen a growth rate of merely 5 per cent so far this year. This means it needs to increase by at least 27 per cent in the remaining half to achieve the Budget target of 17.3 per cent growth.
There are also fears of a shortfall in GST
collection. Union Finance Minister Nirmala Sitharaman’s recent announcements on cutting corporate tax rates have led to worries of a massive fiscal slippage, though she has said the government can meet the fiscal deficit target of 3.3 per cent of GDP for FY20 without compromising on capital expenditure.
As reported earlier, the Centre, in an earlier memorandum to the 15th FC, had indirectly sought a substantial decrease in devolution to the states from the existing 42 per cent of the divisible tax pool.
While the Centre’s memorandum did not directly mention any figure, if its ‘wish list’ was implemented, the devolution would have gone down to 33-34 per cent.
The 42 per cent vertical devolution was recommended by the 14th FC, up from 32 per cent recommended by the 13th FC.
A Finance Commission’s award period runs for five years, as mandated by the Constitution. The 14th FC’s period runs from 2015-16 to 2019-20. The 15th FC’s recommendations kick in from April 1, 2020, and run till March 31, 2025.
A vertical devolution is dividing the tax pool, excluding cess and surcharges, between the Centre and the states, while horizontal devolution is distributing resources among the states. The 15th FC is expected to submit its report to the government on November 30.