The estimates of FY22 tax revenue versus actual collections until last week shows the government's poor fiscal marksmanship, or the accuracy of budget forecasting, to some extent.
The revised budget estimates pegged gross tax revenue growth at 24.1% for FY22. But the first three quarters (April-December 2021) had already clocked in a 44.2% increase, which means, the revised estimates imply that gross tax revenue will decline by 14.8% in Q4, as per an RBI article titled Union Budget 2022-23: Some pleasant fiscal arithmetic, released last week.
This, despite the historical norm of receiving significant proportion of tax revenue (33.2% on average with a y-o-y growth of 12%) in the last quarter of any given fiscal year.
Based on actual tax collections data for April-January FY22, revised estimates suggest an implicit decline of 18.4% in gross tax revenue during the months of February and March 2022, while the implicit decline in corporation tax, income tax, GST, customs duty and excise duty works out to 29.2%, 26.5%, 2.3%, and 20.7%, respectively, the article noted.
In reality, tax collections, barring disinvestment proceeds, are going gangbusters. Gross direct tax revenue as on March 16 saw a stupendous 38% increase over the previous fiscal, indicating that even revised estimates will be over-achieved.
What's unclear though is the reason behind the government's overcautiousness in revenue projections for Q4 - a period when tax buoyancy, or the responsiveness of tax revenue to growth in nominal GDP is typically higher during recovery years.
In contrast, the revised estimates for FY22 pegged gross tax revenue buoyancy at 0.9, as against the average of 1.4 registered in the past years of economic recovery.
Likewise, direct and indirect tax buoyancy have been budgeted at 1.2 and 0.5 in FY22, as against the average of 1.7 and 1.3, respectively in recovery years.
Moreover, buoyancy in FY23 is based on a nominal GDP growth assumption of 11.1%, which will most likely be exceeded. If fiscal forecasts are way off the mark, it undermines the credibility of annual budgets.
While the Covid-19 pandemic related economic uncertainty is one possible factor for such conservativism, it's also likely that we still haven't adjusted to the advanced budget making process.
The modest projection of FY23 nominal GDP at 11.1% also bears testimony to this fact.
Unlike in the past when the first advance estimates of GDP were released at the end of January after taking into account the economic activity of the first three quarters of the fiscal, to facilitate budget making, they are now being released in the first week of January, but this takes into account data of the first two quarters of the fiscal alone, leaving enough room for forecasting bias.
It was only a few years ago that the government seemed to have cracked economic forecasting with accuracy.
For instance, a 2017 SBI Research note observed that there was a significant improvement in fiscal architecture in addition to fiscal consolidation in FY17.
Prior to 2006, the audited figures always remained within the budgeted figure, but the trend reversed and the difference between budget estimates and the CAG audit figures bulged.
In FY17, however, the difference narrowed significantly. Incidentally, the past few budgets too were applauded for transparency in budget accounting. But, as for assumptions and projections of revenue and growth, they are far from actuals.
Tax revenue
Gross direct tax revenue as on March 16 saw a 38% increase over the previous fiscal, indicating that even RE will be over-achieved.