New headache for Modi government? India’s tax collection shortfall pegged at Rs 10 lakh crore

HYDERABAD: That India’s tax collections are often lower than its potential is a known unknown.

Perhaps for the first time, the 15th Finance Commission has arrived at an estimate. Analysing the structural tax gap in India, it pegged the shortfall in tax collections to be over 5% of GDP as against its potential.

Taking FY20 GDP of Rs 203.4 lakh crore, this translates into over Rs 10 lakh crore, or 28% of India’s total budget expenditure this fiscal and even next.

It’ll lower government debt by that much and also reduce fiscal deficit by a significant number.

Which is why the Commission recommended urgent operational and policy changes. The government, it appears, is complying.

On Monday, Finance Minister Nirmala Sitharaman sought to correct the inverted duty structures in GST -- just as the Commission suggested.

 Besides, it sought changes in GST’s IT system and invoice matching.

Importantly, the Commission batted for a review of exemptions, thresholds and concessions in income tax. Sitharaman has already made a beginning in last year’s budget giving two options to taxpayers.

Starting April, they can stay with the old regime with higher tax rates and claim exemptions, or move to a lower tax rate with no exemptions. 

The dominant view is that concessions and exemptions reduce the overall pie of tax revenue available for state and central expenditures.

For instance, the projected revenue foregone in FY20 is Rs 3 lakh crore, up from Rs 2.8 lakh crore in FY19. That’s a sum higher than the total healthcare budget announced on Monday.

The Commission believes exemptions under different direct tax laws breed tax evasion, especially, ‘by the richer groups’ and must be reduced.

Here’s what it says: “Incentives leading to ambiguous interpretations and evasion will need to be eliminated.” 

The proposal comes at a time when tax collections over the next five years are set to grow, but not at the desired pace. Based on the Commission’s assessment, the tax-GDP ratio could increase by 0.7% from 9.8% in FY21 to 10.5% in the terminal year FY26.

This will still be less than the 11% tax-GDP ratio of FY19. Over the medium term, there should be revenue gains from administrative and procedural improvements leading to better compliance and thus bringing the tax-GDP ratio in line with the trends in the recent past.

In any case, projections are often down to the wire.

For instance, the 14th FC projected a trend growth of 15.2% for tax collections during FY16-FY20, while the gross tax revenue grew at a trend rate of 13.9% per year between FY16 and FY19 translating to an aggregate buoyancy of 1.25.

Numbers that matter

The tax shortfall in FY20 compared to FY19 amounts to a sum that is way higher than the total healthcare budget announced on Monday. 

• Rs 3 lakh-crore  Revenue foregone in FY20.

• Rs 2.8 lakh-crore Revenue forgone by Centre in FY19.

• 0.7%  Projected tax-GDP ratio hike in FY21.