Tax revenues will slip

Mohan R Lavi | Updated on March 31, 2020

Covid is likely to hit Budget projections hard

From what is known as on date, the Covid-19 pandemic is far from over. New cases are being reported from across the world every single day. While both the Central and State governments are doing all they can to control the virus, the principal danger appears to be those people who are roaming the streets and, thereby, heightening the risk of community transmission.

Covid-19 will have a significant impact on all the numbers presented in Union Budget 2020. Both direct and indirect tax revenues are going to be well below projections and the proposed big-bang IPO of LIC may have to be pushed to next year. Due dates for filing all tax returns have been pushed to June 30, 2020, and there would be a consequential impact on the returns due later resulting not only in lower but also delayed tax revenues.

Fiscal deficit

All other receipts including disinvestment proceeds would be down. GDP would also go down — to what extent would depend on the tenure of the lockdown and how long it would take companies to find their feet in the post-Covid-19 world. Budget 2020 had predicted a fiscal deficit of 3.51 per cent based on a GDP of ₹224,89,420 crore.

Some are of the view that Covid-19 would not significantly impact the fiscal deficit since both the numerator and the denominator are calculated on lower amounts. It should be kept in mind that the impact of Covid-19 on the total value of GDP is going to last for much longer than a few months. Assuming a 10 per cent reduction in the total receipts and a 30 per cent reduction in GDP, the fiscal deficit comes to 4.55 per cent of GDP.

If one factors in the additional expenses on various schemes amounting to ₹1.7.trillion announced by the Finance Minister, the fiscal deficit could well be in the range of 4.85-5 per cent. The Finance Minister does not have much room to cut back expenses on other sectors in an effort to reduce the fiscal deficit.

The due dates for filing GST returns have been pushed to June 30 and interest and late fees have been waived in most cases. If Covid-19 continues for some more time, the proposed new system of returns as well as e-invoices that are scheduled to be introduced from October 1 would also have to be deferred. The new system of returns is expected to prevent leakage of revenue by false claims of input tax credit — a rampant reality today due to the lack of checks and balances in claiming credits. In summary, the estimated GST collections of ₹6,90,500 crore for 2020-21 would be substantially lesser — we could end up with only around ₹6,15,000 crore.

High fiscal deficits pose multiple collateral risks — governments will be forced to borrow more resulting in deficit financing, savings rates could be adversely impacted, there is a threat of higher taxation in the future resulting in higher inflation and interests rates could reach unaffordable levels.

The government faces another dilemma next year — the GST compensation that the States demanded is due to end next year. Not only has the past compensation not been paid, States are imploring for the compensation to be extended for a few more years.

How the government manages this phase will be interesting to see. Taxpayers should not be surprised if there is a “Covid Cess” under income tax, GST and customs laws. Taxpayers can only hope that like the virus, the cess is also temporary in nature and does not become a tax like some of the other cesses.

The writer is a chartered accountant

Published on April 01, 2020

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