Why govt may have to lower its FY20 tax revenue target a second time

Topics Budget 2020 | Tax Revenue

Tax, Tax revenue,
The Union Budget for 2020-21 has been criticised for presenting tax revenue numbers that are not realistic. How justified are these charges? Are there any early warning signals from the government’s official figures to suggest that the government may not achieve those revenue targets?

Let us begin with the Centre’s net tax revenue numbers, which account for more than half of the government’s overall receipts and impinge on its ability to keep the fiscal deficit at the revised target of 3.8 per cent of gross domestic product or GDP. For the current year (2019-20), the Budget has already slashed the net tax revenue figures by Rs 1.45 trillion in its Revised Estimate to Rs 15.04 trillion, down from Rs 16.49 trillion given in July 2019 in the Budget Estimate.

This nine per cent reduction has already raised questions about the government’s ability to project revenue numbers realistically, keeping in mind the state of the economy and the tax department’s efficiency in collecting the taxes that it had promised at the start of the year. But the more worrying question is: Do these already reduced numbers have to undergo another downward revision?

The provisional unaudited numbers for net tax revenues collected from April 2019 to the end of December 2019, or about nine months of 2019-20, show that the Centre’s net tax revenues are only Rs 9.05 trillion. This is about 60 per cent of the total net tax revenues that will have to be collected, according to the Revised Estimate put out in the Budget on February 1.

In other words, another 40 per cent, or about Rs 6 trillion, has to be collected in the remaining three months of the fiscal year. This is about double the average monthly rate of collections achieved in the first nine months of the year.

Government officials have stated that these numbers are achievable and the last three months of the financial year have in the past seen a smart rise in collections to justify such optimism. Are these assumptions correct?

Consider what happened in 2018-19. The government collected Rs 9.36 trillion in April-December 2018, or about 71 per cent of the full year’s actual net tax revenue collections. This meant that just 29 per cent of the full year’s actual net tax revenues were collected in the last quarter of the year.

Raising that target rate to 40 per cent this year would be quite a task. The nominal growth in the GDP in 2018-19 was 11 per cent, boosting buoyancy in tax collections. But in 2019-20 the nominal growth rate is just 7.75 per cent. So, what will the tax department do to achieve this goal?

Indeed, only once in the last five years have the Centre’s net tax collections in the last quarter of the year been as high as 40 per cent of the full-year collections. That was in 2014-15. That was the year when the government benefitted from higher duties on petroleum products, following a drop in international crude oil prices. In addition, the nominal economic growth rate was about 11 per cent. 

In 2017-18, only about 28 per cent of the full-year actual net tax collections were achieved in the last quarter. In the previous two years, that performance was somewhat better at 32 per cent in 2016-17 and 34 per cent in 2015-16, but nowhere close to 40 per cent as required in the current year (see table).

Assume, for instance, that the net tax collections in the last quarter of the current year do as well as they did in the same period of 2018-19 or 2017-18. Net tax collections for the Centre in January-March 2020 would range between Rs 4.2 trillion and Rs 4.4 trillion. Thus, the full-year net tax collections during 2019-20 will come to about Rs 13.3 trillion or Rs 13.4 trillion.

This will mean a further tax revenue shortfall ranging between Rs 1.6 trillion and Rs 1.8 trillion. The only way the tax department can avoid any further shortfall is to repeat the performance of 2014-15. But that performance was achieved only once in the last five years.

Any further shortfall in tax revenue collections will have an adverse impact on the revenue targets for 2020-21, when the net tax collections are expected to grow to Rs 16.36 trillion. As shown earlier, if in the last quarter of the current year, net tax collections maintain the same pace as Q4 of 2017-18 or 2018-19, total collections in 2019-20 would be only Rs 13.26-13.41 trillion.

As a consequence, the net tax revenue collections growth target for 2020-21 would go up to 22-23 per cent, compared to the nine per cent growth assumed now. Imagine the plight of the tax department, if that were to happen! Taken together with the 223 per cent rise in disinvestment revenues projected for next year, the Budget assumptions for 2020-21 will become even more challenging.

This problem with the government’s tax revenue estimates is not new. But it got worse when the interim Budget was presented in February 2019. At that time, the target set in the revised estimate was significantly higher than what the tax department could reasonably hope to meet. The actual net tax collection figures for 2018-19, released a year later, show that instead of the promised Rs 14.84 trillion, they were actually 11 per cent lower at Rs 13.17 trillion.

To be sure, the revised estimate on net tax collections presented for 2019-20 was relatively closer to the reality. The government had scaled down the Budget estimate for net tax collections of Rs 16.49 trillion by nine per cent to Rs 15.04 trillion in the Revised Estimate for the current year. The embarrassing issue that the government faces now is whether a further downward revision in the same number will be needed by next year.

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