Despite the likelihood of a slowdown in economic growth in the second half of the year, the Union government’s tax collections are on track to significantly outperform its budgeted target this year.
How taxes are currently being collected by the Union government
- Gross tax receipts have already reached the desired level: According to information made public by the Controller General of Accounts last week, gross tax receipts for the first seven months (April through October) of the current fiscal year have increased by 18%, reaching 58% of the full year’s target.
- Healthy growth in corporate tax collection: Under the general heading of taxes, direct tax collections have increased by a solid 26% in the first seven months of the fiscal year. Both corporate and income tax collections have experienced healthy growth.
- Greater than the growth of the nominal GDP: Although the rate of direct collections slowed down from July to October compared to the first quarter, it remained greater than the growth of the nominal GDP in the second quarter.
- Healthy indirect tax collection: On the indirect tax front, GST receipts saw continued, healthy growth in November, rising by 11%.
What does a healthy tax base mean?
- Higher devolution to states: Higher tax revenues at the federal level suggest that states will receive more money from the federal government than the Rs 8.16 lakh crore budgeted for devolution. In fact, the Centre has increased devolution, resulting in double instalments in the months of August and November.
- States may spend more money on their budgets: In addition to the interest-free credit programme offered by the Center, more devolution suggests that governments have ample financial room to enhance capital spending. But thus far, this has not been the case. States’ CAPX has been rather quiet.
- Comforts the government’s financial calculations: According to recent comments made by Tarun Bajaj, the revenue secretary, the government is now optimistic that it will surpass the planned objective by around Rs 4 lakh crore. Higher tax collections will give some relief to the government’s fiscal arithmetic, as spending is likely to also far exceed earlier projections.
Difficulties with the expenditure side
- Expenditure-wise, the Union government is dealing with a significant increase in its subsidy cost.
- Spending exceeds the allocated budget: The actual amount spent on the subsidies for food and fertiliser as well as LPG will be much higher than what was budgeted for. The financial position is expected to get difficult as a result.
- Utilizing effectively is necessary: The general government fiscal impulse will depend on how well states are able to utilise the additional space available to them given that the federal government has maintained the momentum with its capital spending, growing by about 60% in the first seven months of the year.
Conclusion
As the budget deadline draws near, calls for increased spending to support the economy during this unsettling time will only gain momentum. However, the government must resisted the urge. It should adhere to the fiscal consolidation glide path.