For the first time in decades, gross tax revenue is likely to contract in FY21, if economic projections are anything to go by. Not surprisingly, the sharper the GDP contracts in FY21, the deeper will be the decline in tax collections. Economists who fashioned various scenarios — baseline, pessimistc and optmistic —project the contraction well above five per cent.
While Ila Patnaik and Rajeswari Sengupta in a paper for the Indira Gandhi Institute of Development Research found that in a baseline case, net tax revenue (excluding states share) will contract 14.4 per cent, Anubhuti Sahay, Head, South Asia Economic Research (India), Standard Chartered believes tax revenue will shrink by at least 5.7 per cent.
Pre-Covid, the government had set FY21 gross tax collection target at Rs 24 lakh crore, up from the previous year’s Rs 21.63 lakh crore, translating to a 12 per cent growth assuming a nominal GDP growth of 10 per cent.
Within this, personal income taxes and corporate taxes were to grow by 14 and 12 per cent respectively.
Patnaik’s paper assumes the reduction in revenue including tax collections and other proceeds will be sharper even without additional spending.
They expect, in a baseline case, corporate taxes could fall by 17.6 per cent, income taxes 7 per cent and GST 4 per cent.
Custom duties and union excise duties by 20 and 22.2 per cent, respectively. Budget estimates of direct tax revenue for FY21 of Rs 16.3 lakh crore were already ambitious target over the previous year’s revised estimates of Rs 15 lakh crore. Now, both nominal GDP and tax revneue are expected to be lower, they concluded.
Based on tax revenue trends so far, Sahay assumes a 5.7 per cent contraction in combined gross tax collection. This is equivalent to 3.4 per cent of GDP deviation from the budgeted fiscal deficit and could be larger, but will likely be offset by higher taxes on retail fuel.
“In a worst-case scenario, assuming a 6 per cent contraction in nominal GDP, a 11 per cent decline in tax collection and lower-than-expected non-tax/divestment proceeds, the revenue shortfall could increase to 6 per cent of GDP widening the fiscal deficit,” she added.
Notwithstanding the gradual opening up of the economy barring state-level lockdowns, econmists believe the fall in production, trade and consumption of goods and services will persist due to supply chain bottlenecks and demand compression.
It means, tax collections will decidely fall. In fact, they have been missing estimates for three years in a row. This shortfall led to the government missing its fiscal deficit target, although by a short mile.