For years, the tax receipts of Union government have consistently fallen short of the target set in the respective year which together with the expenditure exceeding the target has led to fiscal slippage – a glamorous term for the fiscal deficit or FD (excess of total expenditure over the total receipts). Against this dismal record in the past, 2021-22 will have the unique distinction of the tax collections – both direct and indirect – exceeding the target.
The total direct tax collection (includes primarily personal income tax or PIT and corporate income tax or CIT) net of refund as on March 16, 2022 stood at around Rs 1363,000 crore which is higher the budget estimate (BE) of Rs 1100,000 crore by Rs 263,000 crore. It was even higher than the revised estimate (RE) of Rs 1250,000 crore – as given by the Finance Minister, Nirmala Sitharaman in the budget for 2022-23 – by Rs 113,000 crore.
The gross tax revenue (GTR) (this includes direct taxes, goods and services tax or GST, taxes on petroleum products and customs duty) net of refunds stood at Rs 2050,000 crore crore till February 2. For the whole of current financial year ending March 31, 2022, this could be about Rs 2650,000 crore which is higher the BE of Rs 2220,000 crore by Rs 430,000 crore. The collection is even higher than the RE of Rs 2520,000 crore by Rs 130,000 crore.
Of the Rs 430,000 crore excess of likely actual GTR over BE, while Rs 263,000 crore is the excess in direct taxes over its BE, the remaining Rs 167,000 crore is primarily in GST collection. During 2021-22, while, gross GST collections have been in excess of Rs 100,000 crore every month, in six months, it has even crossed Rs 130,000 crore. The year is expected to end with collection of Rs 1500,000 crore.
As per the Finance Commission (FC) formula, 41 percent of tax receipts of the Union government – excluding cess collections which are not part of the divisible pool – are shared with the States. After these mandatory transfers to the states, the amount remaining with the Centre could be around Rs 1850,000 crore, compared with the corresponding BE of Rs 1550,000 crore and RE of Rs 1765,000 crore.
The excess of Rs 300,000 crore in actual net tax receipts by the Centre over the BE (1850,000-1550,000) has helped in making up for the slippage in other areas of revenue as well as expenditure. For instance, proceeds from disinvestment of government’s shareholding in public sector undertakings (PSUs) during 2021-22 is expected to be only Rs 13,500 crore against BE Rs 175,000 crore leading to a shortfall of Rs 161,500 crore.
On the expenditure front, the actual outgo on fertilizer subsidy will be Rs 140,000 crore against BE of Rs 80,000 crore leading shortfall of Rs 60,000 crore. Likewise, the actual payment on food subsidy is Rs 286,000 crore against budget provision Rs 243,000 crore implying a shortfall of Rs 43,000 crore.
Even after providing cover for the slippages under the above three heads which add up to Rs 264,500 crore, the excess net tax collection of Rs 300,000 crore would ensure that the FD for 2021-22 remains close to the target of 6.8 percent of GDP. But, the RE of FD mentioned by FM on February 1, 2022 is 6.9 percent. This is because the entire excess of net tax collection is not reflected in the RE. Once the un-reflected amount of Rs 85,000 crore (1850,000-1765,000) is captured, actual FD will be close to budgeted FD.
Unlike in the previous years when shortfall in revenue from tax collections used to be made up by taking recourse to non-tax receipts such as dividend from PSUs and public sector banks (PSBs), proceeds from selling government shares in one PSU to another, appropriation of surplus generated by the Reserve Bank of India (RBI), proceeds from sale of spectrum for telecom services etc, this time around buoyancy in tax collection is helping in balancing the budget.
This is the way forward as excessive reliance on non-tax receipts not only lands the budgetary exercise in an uncertain trajectory (for instance, dividend from a PSU depends on a host of factors specific to the undertakings and there is no certainty that it will deliver a target amount) but also, lead to undue interference in the working of an entity from where the government is expecting the revenue. For instance, during 2017-18, ONGC, an upstream oil PSU was asked to buy 51.11 percent of its shares Hindustan Petroleum Corporation (HPCL) forcing the former to borrow over Rs 30,000 crore.
Looking at the reasons behind the exceptional buoyancy in tax revenue, it turns out that it is not just the recovery in economic activity (thanks to a muted third wave of Corona pandemic) but no less important is the ‘increase in compliance’.
On the direct tax front, IT department has successfully used technology to reach out to the assesses in non-intrusive ways; for instance, sending e-mail reminding them to file return if not already or generating an ‘auto-populated’ form – a form in which income of the assesses from various sources is pre-filled. In particular, intensive and extensive use of ‘data analytics’ and ‘artificial intelligence’ has prompted assesses to report their income accurately (when he is confronted with a particular figure ‘so much capital gains made’, there is no way, he can hide or under-state it) and pay tax.
As for indirect taxes, the strengthening of GST infrastructure with emphasis on driving all businesses to be a part of the network, truthfully report all transactions (generation of e-way bills, e-invoices are mechanisms to make it happen) and prevent availment of fraudulent input tax credit or ITC (an acronym for refund of tax paid by a supplier on purchase of inputs – the most crucial provision under GST to prevent cascading effect of tax on tax) claims.
While, these efforts should be continued, there is also dire need to rationalize and simplify the GST system by reducing the number of slabs, doing away with certain exemptions and including petroleum products such as crude oil, natural gas, petrol, diesel etc. The GST Council should promptly take steps in this regard.
In the direct tax area, there is an urgent need to address the anomalies in PIT, CIT and the capital gains tax (CGT). In particular, the existing CGT is a highly differentiated tax structure with varying rates depending on the asset class, holding period, whether the asset is listed or otherwise and so on. It is prone to misuse and evasion. If, the structure is simplified to treat all capital gains irrespective of the source as an addition to assesses’ annual income and taxed at the rate applicable to the relevant slab, the government can rake in huge revenue.
No less important is the need to rein in expenditure. Any amount of efforts to boost tax revenue will be set to naught if the expenses particularly on ‘welfare schemes’ are allowed to grow in an unsustainable manner. Here, substantial savings are possible by restricting coverage, cutting costs, improving efficiency etc. For instance, the decision to continue delivery of free food under Pradhan Mantri Garib Kalyan Yojana (PMGKY) for another 6 months – when the pandemic has subsided and the economic activity is gathering momentum – was totally uncalled for.