With just two months for Budget, not much on cards

The hopes of getting any major income tax relief in the upcoming Union Budget are fast diminishing. The direct taxes are not growing even at 4%. The Centre’s direct tax collection growth has plummeted so quickly that it has stopped publishing the data. The GST non-compliance and a woeful decline in its revenues have become such big issues that the new indirect tax may go back to the drawing board to address these.

The GST collection has been declining, with the latest numbers showing a dip of over 5% year-on-year. States have been crying hoarse for payment of compensation cess. They want an urgent meeting to resolve looming conflict between the centre and states over the revenue sharing but meetings of the GST Council have been stopped abruptly.

For data on direct taxes, one has to now depend on the numbers compiled by the Comptroller General of Accounts (CGA), which comes in the public domain with a lag of five to eight weeks. As a consequence, till date, one does not know what has been the direct tax collection in October. In normal circumstances, the Central Board of Direct Taxes would, by now, be preparing to release the direct tax collection and growth numbers for November. Tax officials confirm that the mop-up will not even touch 4%, net of refunds, till mid-November. The FY20 Budget target is pegged at 17.3%.

On indirect taxes front, GST collections may have inched up in November (the data is expected next week) due to festive buying in the preceding month, but the truth is that it has been declining for many months now. This has not only forced the Centre to withhold compensation payments to states but also resulted in the centre postponing the next GST Council meeting. The last GST Council meeting was held on September 20 in Goa. Sources close to the development said the council may not meet in the near future.

Centre defaults on compensation

On Monday, Revenue Secretary Ajay Bhushan Pandey has called a meeting of revenue officials from states to take stock of their revenue situation and the kind of pressure their fisc has been facing. The Centre has slapped a kind of financial crisis on the states by withholding their compensation payment for two months since August.

It is staring at default in October. Many states do not have the headroom to borrow more from any other source.

It is pertinent to note here that states face stricter fiscal norms than the Centre, whose Fiscal Deficit and Budget Management (FRBM) guidelines get re-adjusted according to needs. The Centre has collected Rs 56,801 crore in April-October in compensation cess but disbursed only Rs 45,744 crore to states till July.

Under the new tax regime, as per the Goods and Services Tax (Compensation to States Act), 2017, 14% guaranteed compensation is provided to the states.

This arrangement will come to an end in 2022, but the Centre is showing signs of withdrawing it pre-maturely. Taxes contribute 68% to government revenues. Direct taxes contribute majorly – about 41%.

On the indirect taxes front, 19% comes from GST and 8% from union excise duties. But a sluggish growth of less than 4% in net direct taxes and a decline of over 5% in GST has left the Centre clutching at straws.

This is also impacting the financial markets with yields on 10-year government bonds climbing at a faster rate due to the fear that the cash-strapped government could borrow more. The yield on the 10-year paper was seen rising up to 6.54% from 6.45% on Friday. Higher yields indicate higher risk to the economy.

Closer to the Union Budget, there would be more expenditure cuts and withholding of payments to service providers. With the fiscal space shrinking by the day, there are plans to slow down spending on revenue as well as capital accounts. A high fiscal deficit may constrain the ability of the Centre and state governments to spend on infrastructure. That makes the overall gross fixed capital formation (GFCF) as a proportion of GDP equivalent to the fiscal deficit.

Last year, the government had effected a major cut in its spends to meet its fiscal deficit target but as a consequence of that the GDP growth too slowed down to 5.8% in the January-March quarter of 2019-20. The government spending was only Rs 23.11 lakh crore out of Rs 24.57 lakh crore provided in the Budget towards expenditure.

Cut in expenditure

The expectation is that the expenditure cut could be even deeper this year in the wake of a hefty corporation tax cut and other give-aways. The union budget is in the making and insiders expect there could be a downside revision in the tax collection target for 2020-21 because the economy is just not doing well enough to generate more taxes. Only cosmetic changes would be effected on the income tax side with benefits to individuals in the lowest income tax slab.

However, the government is expected to give assurance of early implementation of Direct Taxes Code, which promises a fortune to the salaried taxpayers, and seeks to address cesses and surcharges and put a cap on the highest tax bracket.

On the GST front, the council may work out ways for more coordination between itself and the Finance Commission so that revenues, rate cuts and exemptions are synchronised.