Govt may cut spending as tax inflows fall

The government could be forced to cut spending on key infrastructure such as railways and highways as lower-than-expected tax collections and sluggish growth have upset its Budget calculations, two Finance Ministry officials said.

Tax receipts were about $7.8 billion in July — a little over half the monthly target — mostly because millions of firms failed to comply with the new Goods and Services Tax (GST) system.

The big worry is that economic growth, which slipped to a three-year low in the last quarter, could take a further hit if the public spending that largely underpinned expansion were to be slashed. “There is a concern over lower tax collections,” a senior Finance Ministry official said.

Significant shortfall

The revenue shortfall could be at least ₹800 billion ($12.5 billion) if the current trend continues until the end of the year, a second official said, forcing a re-think in government spending.

He said receipts from individual and corporate income tax may slightly overshoot the target of ₹9.8 trillion ($152.8 billion) for the whole year, partly due to a crackdown on tax evaders. And in coming months, GST collections may pick up.

Both officials spoke on condition of anonymity.

Without spending cuts, the second official said, the fiscal deficit could slip to 3.5 per cent of GDP, from the target of 3.2 per cent that the Modi government has set for 2017-18.

The main problem has been the introduction of the GST. Ambiguous rules, an onerous return filing system and glitches with its IT back-end have made doing business far more complicated for many companies.

Frequent changes in tax rates after the GST’s launch have heightened business uncertainty, resulting in many firms failing to register for the new tax.

GDP growth itself has slowed to 5.7 per cent in the April-June quarter from 7.9 per cent a year earlier.

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