For the new Finance Minister preparing the full Union Budget for 2019-20, the challenge of ensuring that BJP’s poll promises are met without adversely impacting the fiscal math is going to a tough one, given the ongoing problems with tax revenues. The Centre had to revise the estimated GST collection for FY19 lower by ₹1 lakh crore as lowering of rates, greater leeway for small businesses and tax evasion, impacted collection. But besides indirect tax, the Centre has also struggled to meet its direct tax target for the last fiscal. As a result, total tax revenues collected in the first 11 months of the last fiscal year amounted to only 73.7 per cent of the target. Despite a sharp cutback in expenditure, lower tax revenues bloated the fiscal deficit to 134 per cent of the estimates up to February 2019. Over-estimating revenue collections and brushing aside the ongoing challenges will take the country further away from the path laid down by the FRBM Act.
The Centre appears to have been too optimistic in revising the direct tax collection for FY19 higher by ₹50,000 crore to ₹12 lakh crore in the interim Budget. This might be difficult to achieve given the difficult economic conditions. With listed companies in the BSE 500 basket reporting a 7 per cent contraction in profit in the first 9 months of FY19, it is obvious that corporate tax collections will not be too robust. Also, growth in direct tax collections has been sharply lower in years when economic growth slowed down. The Centre’s efforts to increase the tax base are not having the desired results either. While the number of returns filed has increased 80 per cent and the number of tax payers grew 65 per cent between FY14 and FY18, this is not resulting in a dramatic increase in income for the exchequer.
GST collections can be improved with higher scrutiny on information filed, implementation of the new GST returns and stricter enforcement of the e-way bill system. Simplification of IT returns, implementation of RERA and limiting cash transactions are also the right way to go, but this is not enough. With a large unorganised sector and agricultural income being outside the ambit of tax, it is clear that tax revenue can be improved only if the Centre does some serious thinking on bringing a portion of agricultural income, above a certain threshold, into the tax net. Tax reforms must also aim to reduce income inequality in the country, caused by excessive taxation on the salaried class while the non-salaried find it easier to escape the tax net. It is clear that the Centre has much more data available now with the linking of most financial transactions to PAN. But the revenue department needs more resources to mine this data effectively to identify bigger tax evaders. Some tough decisions need to be taken in Modi’s second term to take India’s tax to GDP ratio closer to its peers.