RBI's fund transfer eases Centre's gross tax revenue growth target to 16%

The Reserve Bank of India’s (RBI’s) decision to transfer Rs 1.76 trillion to the central government would potentially reduce the Centre’s gross tax revenue target for 2019-20 (FY20) by Rs 1 trillion due to the very nature of the revenue. The RBI board accepted the Jalan Committee recommendations on Monday.

This would make the fiscal deficit target of 3.3 per cent of gross domestic product easily achievable, as tax revenue (gross) would now be required to grow at 16 per cent in the remaining part of the fiscal year. Had it not been for the extra transfer, the Centre would have needed to manage growth of 22 per cent in gross tax revenue over the previous year.

The reason? The RBI’s transfers would effectively add Rs 58,000 crore to the Centre’s kitty in the current fiscal year, but as non-tax revenue not shared with states. Had the transfer amount remained the same as the Union Budget expects, the Centre would have required to collect Rs 1 trillion in the form of taxes in order to manage Rs 58,000 crore for itself, as Rs 42,000 crore (42 per cent) would have gone to states, according to the 14th Finance Commission formula for devolution of taxes. 

Gross tax revenue refers to tax collection prior to devolution to states.

Thus, by getting a non-tax revenue windfall of Rs 58,000 crore — all for itself — the Centre can let go of Rs 1 trillion worth of gross tax revenue, and ease worries emanating from slow growth in income-tax and the goods and services tax (GST) to some extent. 

However, states put together could potentially lose Rs 42,000 crore of share in tax revenue in this process. 

“Every extra rupee given by the RBI reduces the central government’s tax requirement by Rs 1.72, as 42 per cent of tax revenue goes to states, while the entire surplus transferred by the RBI accrues only to the Centre,” a senior government official told Business Standard

The board of RBI decided to transfer Rs 1.76 trillion worth of excess profits and capital reserves to the central government for July-June 2018-19, based on recommendations made by the committee on economic capital framework headed by Bimal Jalan, former governor at the central bank. With Rs 28,000 crore transferred in the previous fiscal year as interim dividend to meet revenue shortfall back then, the Centre would get Rs 1.48 trillion in FY20. 

As the Budget in July had already budgeted a dividend of Rs 90,000 crore from the RBI, the recent decision would give the government additional revenue of Rs 58,000 crore in the current fiscal year. This would exclusively belong to the Centre, lending a helping hand to achieve the fiscal deficit target. 

In the Budget presented in July, Finance Minister Nirmala Sitharaman had projected 18 per cent growth over previous year’s provisional gross tax revenue. Till now, direct tax collection has grown by 5.7 per cent (till August 15, as reported by this newspaper), and the GST collection by 6.8 per cent till July. 

This poor growth in the initial months pushed up the required growth in tax revenue in the remaining nine months (July-March) to 22 per cent. Courtesy a windfall from the RBI, required growth has come down to 16 per cent.

However, another senior official involved in the Budget preparation process said it will depend on how the government decides to spend this money, and the revision, if needed, would only be made when the Revised Estimates would be calculated in January 2020. 

The RBI’s transfers in FY20 would also be the highest in terms of their impact on the Centre’s expenditure. They would occupy more than 5 per cent of the total expenditure of the Centre.

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