Budget 2020: Nirmala Sitharaman stares at massive shortfall in tax collection this year

It will be a difficult moment for the country’s first full-time women Finance Minister Nirmala Sitharaman who has been given the responsibility of turning around the country’s economy by Prime Minister Narendra Modi in his second term. The biggest challenge for the Government at the moment has been the revenue mobilisation.

New Delhi:When Finance Minister Nirmala Sitharaman rises to present her second Union Budget this Saturday, her revenue collection number may not add up to what she had projected in July last year while presenting her maiden budget. According to the latest official data, the Union government’s net tax collection was Rs 7.5 lakh crore in the first 8 months of this fiscal (April to November), which is just 45.5% of the budget target of Rs 16.5 lakh crore for the full fiscal.

It will be a difficult moment for the country’s first full-time women finance minister who has been given the responsibility of turning around the country’s economy by Prime Minister Narendra Modi in his second term. Prime Minister Modi picked Nirmala Sitharaman for the most challenging task as he lost his trusted party colleague Arun Jaitley to a deadly disease.

However, Nirmala Sitharaman has been grappling with the double whammy since the start of Modi 2.0 as an already slowing economy took a turn for the worse immediately after the inauguration of Prime Minister Narendra Modi’s in May last year.

The GDP growth which had already declined to 5.8% in the last quarter 2018-19, further declined to just 5% in the first quarter (April-July) in 2019-20 and then further deteriorated to just 4.5% in the second quarter (July-September), the lowest since the last quarter (January-March) of 2012-13. The revenue projection made by Nirmala Sitharaman in her maiden budget presented in July 2019 also came down crashing.

“The biggest challenge for the Government at the moment has been the revenue mobilisation. With the growth slowdown, the revenue collection has also come down,” said Sunil Sinha, Principal Economist of rating agency India Ratings, a Fitch Company.

According to the latest data made available by the Controller General of Accounts (CGA), the Corporation Tax, the single biggest source of revenue for the Union government this fiscal, registered a decline of Rs 2,652 crore in comparison with the collections during the first 8 months of the last fiscal. The Centre had received Rs 2,91,254 crore between April to November 2019 whereas this year it received only Rs 2,88,602 crore.

Though the decline is marginal in absolute terms but in comparison with the budget projections made by the finance minister, it’s extremely sharp as Nirmala Sitharaman had estimated that Corporation Tax collection will register a sharp increase of 14.15% in this fiscal, from Rs 6.71 lakh crore in 2018-19 as per the revised estimates to Rs 7.66 lakh crore in 2019-20.

The situation is expected to get worse as the initial impact of corporate tax rate cut announced by Nirmala Sitharaman in September last year will only be known in this year’s budget and true impact will only be known in next year’s budget when actual collection figure will be given in February 2021.

But the negative impact was already visible on the Corporation Tax collection numbers in the next two months – October and November 2019 – the latest period for which the data is available in public domain. In October 2019, the Corporation Tax collection declined to Rs 23,429 crore against the collection of Rs 26,648 crore during the same month a year ago.

The decline was even sharper the next month when the collection declined to just Rs 15,846 crore against the collection of Rs 20,864 crore in November 2018.

It brought down the total net tax collection (both direct and indirect taxes) of the Union government to just 45.5% of the budget estimate in the first 8 months of this fiscal as against 49.4% during the same period of the last fiscal (2018-19).

Economists believe that the situation is going to get worse from here despite marginal improvement in GST and Personal Income Tax collections, the second and third largest sources of revenue for the Union government at Rs 6.63 lakh crore and Rs 5.69 lakh crore as per the budget estimates.

“After the announcement of corporate tax rate cut last year, we have calculated that the Union government’s tax collection will be Rs 1.7-1.8 lakh crore less than its budget estimates. Our calculation suggested that the net impact of corporate tax cut would be to the tune of Rs 70-80,000 crore only and not Rs 1.45 lakh crore as projected by the government but overall cumulative decline in both direct and indirect tax collection will be around Rs 1.7-1.8 lakh crore,” Sunil Sinha told ETV Bharat.

According to a Reuters report published last week, the direct tax collection in this fiscal is expected to be lower than the previous year’s collection, a rare event that will be the first such case in nearly two decades.

In her budget estimates presented in July last year, Nirmala Sitharaman projected that direct tax collection will grow at a healthy rate of 11.25%, from Rs 12 lakh crore in 2018-19 to Rs 13.35 lakh crore in 2019-20. She had reasons to be confident as both Corporation Tax and Personal Income Tax have shown healthy growth in the last two fiscals, registering an increase of Rs 1 lakh crore each between 2017-18 and 2018-19.

In 2018-19, the Centre’s Corporation Tax collection was Rs 6.71 lakh crore (RE) against the target of Rs 6.21 lakh crore (BE), which was also an increase of Rs 1 lakh crore over the amount collected during 2017-18, Rs 5.71 lakh crore (actual).

Similarly, the Personal Income Tax collection also registered an increase of nearly Rs 1 lakh crore between 2017-18 and 2018-19, from Rs 4.31 lakh crore (actual) to Rs 5.29 lakh crore (RE) in 2018-19.

However, the entire growth story turned upside down within a year as GDP growth slipped from 5.8% to just 4.5% in just 9 months.

Sunil Sinha said India Rating’s earlier forecast of the Centre missing its tax collection target by Rs 1.7 lakh crore was based on the assumption that the real GDP growth this year will be between 5.5% to 5.6%. He says now several agencies have further lowered the projected GDP growth rate to below 5%.

This month, the International Monetary Fund (IMF) also lowered its forecast for the country’s GDP growth for 2019-20 to just 4.8%.

However, the finance minister’s problems do not seem to end there.

Sunil Sinha said the biggest trouble is that we are still calculating the revenue collection on the assumption of 5.5-5.6% GDP growth but that is real GDP growth rate. However, the tax response is not to the real GDP growth, tax response is to the nominal GDP growth.

“The nominal GDP growth rate for the second quarter (July-September) has come around at 8%, whereas in the budget the government assumed that the nominal GDP growth will be 11-12%,” he observed.

Real GDP growth rate is calculated by deducting the wholesale price rate (WPI) from the nominal GDP growth which also includes inflation while arriving at the value of gross domestic production of a country in a given period.

Sunil Sinha, who has closely tracked macro-economic indicators for India Ratings said government's assumption of tax collection is going to go for a toss and it will be far away from its tax collection target no matter whatever it does.

(Article by Senior Journalist Krishnanand Tripathi)