tax revenues

What Should India’s Tax Reform Trajectory Look Like?

Honing in on a consumption-based tax system should be the ideal goal, rather than slashing corporate tax rates.

Finance minister Nirmala Sitharaman’s latest move to cut basic corporate tax rates to 22% from 30%, for domestic companies that currently don’t avail any tax exemptions, has received a celebratory response from India Inc.

Termed as a ‘bold’ move by most within the business community, the step has been welcomed at a time when a dismal private investment growth scenario is seen across most sectors over the last five years. Not only has India’s manufacturing growth not taken off, in an indictment of the government’s ‘Make in India’ plan, but export trends are not pretty either.

In hope of boosting fresh investments in manufacturing amidst other sectors, the finance minister also slashed corporate income tax to 15% (from 25%) for domestic companies that are incorporated on or after October 1 and those likely to commence their production on or before March 31, 2023.

Also Read: Explainer: Will Nirmala Sitharaman’s Corporate Tax Cuts Save India’s Economy?

Further, in the case of capital markets, to increase the flow of funds, the government has effectively decided to roll back its ‘increased surcharge’ on certain investors.

While these steps may cyclically address waning private investment sentiment, it will certainly affect the government’s fiscal deficit mark and at the same time likely impact India’s tax-GDP ratio.

Union finance minister Nirmala Sitharaman announced a corporate tax cut. Photo: PTI

On closer observation, if we look at tax data over the last three years, the average income tax collected last year has seen a declining trend, even as the overall tax base has continued to widen from the government’s quest to formalise India’s economy. Last October 2018, e-filing of tax returns increased up to 70%, while the average income tax paid by individuals came down by 32% (to Rs 27,083).

In the two years before that, the e-return filing growth (year-on-year) went up by 24% and 29% respectively, and average income tax paid was Rs 44,000 and Rs 40,200 respectively.

One reason for this could be that the government, in its effort to get more people under the taxable base, is gradually increasing some individual (and corporate) tax exemptions, which allows more people to report their incomes and file e-returns, but subsequently end up paying less tax annually. This, inversely affects the fiscal base, in terms of tax revenue, for the government.

With shrinking collections from tax revenues, and the corporate tax cuts announced now, the government may end up most likely making strategic cuts to its welfare expenditure plans (or worse delay disbursements to ministries) over coming months, in order to keep its fiscal deficit mark ‘low’.

And if this happens, not only will this worsen India’s progress in terms of human capital development (channelised through social welfare schemes), but also exacerbate some of the existing income and wealth inequities that are entrenched within India’s economic landscape.

This should make one wonder: to what extent will the measures that the government is currently undertaking, actually address the ‘structural’ inequities driving the economic slowdown?

Wealth creation hasn’t disappeared

After all, it isn’t as if wealth creation has disappeared in India. In its 2018 Global Wealth Report, Credit Suisse reported how the richest 10% Indians own 56% of the nation’s wealth, where the richest 1% own 51.5% of the wealth, while the bottom 60% owns less than 5%. It is remarkable how in a democracy, the richest 1% have been able to consistently maintain their share of wealth year-on-year, while the majority remains meekly destitute.

Corporate tax cuts, in a sense, provide a sugar-rush to an economy. Investors feel happy, albeit more temporally in the short term, buying more stocks, which puts a smile on the faces of stock traders and India’s financial markets. Others will invest majorly in greater capital-intensive modes of production, which may drive nominal growth rates for a period, but hardly do much to boost employment or create higher wage-paying opportunities.

As Adam Smith has argued extensively, the wealth of a nation actually lies in ensuring greater ‘labour productivity’, a higher ‘per-capita income’ (across income classes) and greater ‘division of labour’ (through competitive market selection). To Smith, the ‘science of the legislator’ (i.e. the state) may best ensure this by allowing greater competition in labour-intensive modes of production – offering a competitive price to an average consumer, while allowing the workforce to gain skills on the job for higher wages over time.

Wealth inequality in India has increased. Photo: Reuters/Vivek Prakash

Slashing corporate tax and organising loan melas to push for ‘cheaper’ business lending may accentuate existing income and wealth inequities while narrowing competitive behaviour. One likely reason for this is how most big-businesses in India (across automobiles, pharma etc.) rely on capital-intensive modes of production. With tax cuts, they, and other foreign companies, might increase their scale of investment for greater profit. As a result, the nature of the ‘tech-based investment models’ may hardly change the existing scale (and rate) of labour productivity or generate higher-wage paying opportunities for participating workforce across groups.

Also Read: Will the Corporate Tax Cut Boost the Economy?

There is, in fact, a stronger case for fiscally incentivising labour-intensive or higher wage-producing sectors and businesses the within them. Even countries like Taiwan, South Korea, during phases of industrialisation in the 1960s and 70s, allowed for a greater policy-complementarity between labour and capital intensive sectors to ensure a greater (and skilled) participation of workforce across sectors.

At the same time, in India, from the perspective of fiscal policy, a way to ensure fiscal consolidation while progressively creating fairer wealth and income distribution may require a progressive consumption tax over time.

Consumption tax

The idea in favour of imposing a consumption tax, especially in countries where consumer sentiment is strong and wealth inequities are higher, has been debated by economists for some time now. Kenneth Rogoff in a recent article presented a case for imposing such a tax in the United States too, where wealth inequalities across income classes have increased since the late 1970s.

A consumption tax is seen as a tax imposed on consumption, as opposed to some other measure of ability to pay, most notably income. In India, our data on consumption-based surveys (even at household levels) and trends seen within them has been observed as a principal method for understanding and analysing various kinds of inequities, and thus, can allow policy-makers to have a reasonably fair idea on considering a consumption tax that progressively accrues income from higher consumers.

In practice too, consumption is much easier to measure than income, and the dynamic efficiency gained from encouraging savings and investment could be large. As in India, we have already been seeing a gradual erosion of household savings, a consumption-based tax structure can help encourage the value of savings –for further (domestic) investments and financial credit-creation. The transitional difficulties, often associated in implementing such a system, are more likely in nations where consumption-based data and its sources are weak.

In India, a relatively more robust consumption-based household data allows any such transitional costs to be minimised. For a start, in a graduated implementation cycle, at least one can consider imposing a marginal consumption or spending tax side-by-side to existing income-taxes, which can then be phased out over time.

Another advantage of a consumption-based tax system is one that may allow certain natural resources (like water) to be used in fixated quantum. A higher carbon-consumption tax may over time channelise resources towards ‘renewable’ or eco-sensitive modes of production, which will take the policy-discourse away from providing any ‘subsidies’ on renewables but to encourage them through a consumption-based tax system.

With high unemployment levels amongst educated youth, real-wages diverging in rural and urban areas (due to poor farm incomes), and the broader real-wage growth trend flattening across sectors, Smith’s constitutive elements of ‘wealth’ – seen in the relative importance of labor as against any other factor of production – can be progressively realised through a fairly imposed consumption-based tax system.

As one of the measures, this can allow the state to accrue income from higher consumers (i.e. those with a higher willingness to pay) and allow for greater fiscal incentivisation of worker-productive sectors of occupation and production, which in India would relate to agro-based industries and those part of a farm-to-factory manufacturing supply chain.

Deepanshu Mohan is an associate professor and director, Centre for New Economics Studies at O.P. Jindal University.

The Budget Fails to Grasp India’s Problem is Weak Aggregate Demand

There is a paucity of demand of India – which requires an expansionary fiscal policy to revive employment, growth and investment.

Budget 2018-2019 may prove to be a mere footnote in the tenure of the NDA government. Credit: PTI

There was widespread apprehension in the capital market that 2018 budget would be “populist” and voter-friendly in a year when state elections may be simultaneously held with a national election.

Indeed the dressing is there: hardly had Jaitley finished his speech than the channels started telling us this budget was all about health and agriculture. However, the bigger numbers suggest otherwise: after a slight fiscal relaxation in the current year, the government has projected a fiscal contraction for FY 2019. The fiscal deficit is expected to decline to 3.3% from 3.5% in FY 2018.

The monetarist economists populating most capital market-related firms, brokerage research, and credit rating agencies, as well as the bond market, may be apprehensive that the deferring of the fiscal glide path of 3% between FY 2018 and FY 2020 will lead to a rise in bond yields and inflation.

However, the major issue confronting the Indian economy is not demand-pull inflation, but a paucity of demand, which requires an expansionary fiscal policy to revive employment, growth and investment. It is also pointless trying to control inflation emanating from international oil prices by suppressing domestic demand, a recipe for stagflation.

Source: Union Budget papers.

Sadly, over the years, total central government expenditure to GDP has been on the decline.

In FY 2018 (RE) it increased marginally to 13.2% – including the recap bonds of Rs 80,000 crores, it comes to 13.7%, as compared with 13.1% in FY’2017. In FY 2019 (BE), central government expenditure to GDP decreases to 13% (including the recap bonds of Rs 65,000 crores, it would be 13.4%).

The obsession with fiscal contraction and the impact any relaxation will have on foreign capital flows and the bond market has dictated fiscal policy of both the UPA and the NDA governments; in this both Congress and the BJP are in complete agreement.

With such policies it is no surprise that the Indian economy is stagnating, with private sector investment and employment in the doldrums (notwithstanding some academics arguing that employment has increased in the formal sector).

Investment & savings (as % of GDP)

Source: Economic Survey, 2017-2018.

It is in this context that the twin balance sheet problem has to be seen.

The consensus view in the government and the market is that if the balance sheets of indebted corporate India and the government banks are mended, growth and investments would revive. To facilitate the strategy the Insolvency and Bankruptcy Code was introduced and a belated recapitalisation of the government banks was announced. The recap, even if unnecessarily delayed, may revive lending a bit. But even if the twin balance sheet issue is resolved, growth in private capital investment and employment may not really revive if demand in the Indian economy remains weak. Indeed, an academic paper by J Dennis Rajakumar in 2015 argued, contrary to popular opinion, the Indian corporate sector in its entirety was not over-leveraged and the bulk of the companies who were under-leveraged were not investing as it was not profitable on account of poor demand.

The notion that government should increase capital investment but at the same time contract other expenditure, thus reducing the fiscal deficit, fails to grasp that it is weak aggregate demand that is the problem, and a declining fiscal deficit will merely aggravate matters.

A sector which may benefit handsomely is health insurance, where a few companies have been recently listed on the stock market. The budget announced the launch of a “flagship National Health Protection Scheme to cover over 10 crore poor and vulnerable families (approximately 50 crore beneficiaries) providing coverage upto 5 lakh rupees per family per year for secondary and tertiary care hospitalisation.” A coverage of Rs 5 lakh per family is substantial, but in the budget papers there appears to be no specific outlay for such a huge scheme.

In a media interaction post-budget, Arvind Subramanian indicated that it will be financed through the education and health cess. It appears the government is attempting to replace its responsibility to provide public healthcare with tacit subsidies to private healthcare in the form of insurance premiums. It may prove to be a bonanza for private health companies. A similar exercise in crop insurance proved highly lucrative for private health insurers but did not provide relief to small farmers.

To the extent that this budget appears to be little different from earlier fiscal-consolidation budgets, corporate earnings may not significantly improve. The hope that corporate performance may improve on the back of rising exports and global growth has to also be seen in the light of hardening global bond yields and the disruption in capital flows it may cause to emerging economies.

The Indian capital market for some time has decoupled from fundamentals, driven by liquidity, even as corporate earnings have stagnated. Hence the future of the Indian stock market may be influenced by shifting developments in developed economy interest rates and domestic liquidity, instead of fundamentals. Arvind Subramanian had in his earlier Economic Surveys argued for fiscal expansion but in the present environment of a revival in global growth and higher bond yields, he believes the space is now closed.

The Narendra Modi government has implemented major reforms without any revival in private sector capital expenditure and yet the monetarist economists push for even more reforms and further privatisation. The only game left in town is for India to be spruced up and wait in vain to be picked up. In this regard, budget 2018-2019 may prove to be a mere footnote in the tenure of the NDA government.

Hemindra Hazari is an independent market analyst.

Budget 2018: The Numbers Need to Be Evaluated With Care

The revised fiscal deficit target of 3.3% does not stand the test of credibility as it is based on a rather optimistic assumption that GDP will grow by 11.5%.

Finance minister Arun Jaitley. Credit: Reuters/Amit Dave/Files

The Union Budget 2018-19 has made a significant departure from the “fiscal glide path”. The target fiscal deficit of 3.2% has been abandoned, and the 3% target for FY 2018-19 has been pushed out to FY 2020-21.

The realised fiscal deficit, as per the budget documents, is 3.5%. However, the actual fiscal deficit number is surely higher, given that a part of the proceeds of disinvestment are from other public sector companies. For example, even before rising to present the budget today, finance minister Arun Jaitley managed to raise Rs 37,000 crore in a transaction with ONGC, which bought shares of HPCL, taking on the debt the government would have had to take.

Depending on how much of the Rs 1 lakh crore budgeted for disinvestment receipts is going to be from other PSUs, that amount should rightfully be counted as a part of the fiscal deficit. So the fiscal deficit for 2017-18 is actually more than 3.5%; just adding the Rs 37,000 crore of the ONGC-HPCL transaction, for example, takes the fiscal deficit number to 3.76%.

A departure from earlier targets

The fiscal deficit target for next year is 3.3%. This is based on an assumed growth rate of 11.5% of the gross domestic product (GDP) in current terms. First of all, the target is a major departure from the earlier target as per the original “fiscal glide path”, which was 3% for 2018-19. Second, the revised target of 3.3% itself does not stand the test of credibility. It is based on a rather optimistic assumption of GDP growing by 11.5% in nominal terms; while in 2017-18 the projected achievement is 9.5% in nominal terms. There is every likelihood that this may not actually be achieved which will impact the tax revenue targets.

Some of the tax revenue targets for next year – on the same lines – are quite aggressive. For example, the targeted growth of personal income tax is almost 20% (19.88%). It appears this is based on the higher buoyancy seen in the last two years, described in some detail by the finance minister in his budget speech. To assume this buoyancy will continue in the coming year, given that the government’s claim is that it was demonetisation that caused it in the first place, is a leap of faith which is unlikely to be borne out.

Also read: As Deficit Target is Breached, Jaitley May Accept N.K. Singh Panel Advice to Save Face

On GST, there is a target of Rs 7,43,900 crore. This is over 25% higher than the annualised collection of the GST for 2017-18 which works out to Rs 592,841 crore (444,631 X 12/9). Both these tax growth targets could slip in 2018-19, leading to a slip up again in the fiscal deficit target.

Expenditure initiatives

The finance minister has announced a large number of expenditure initiatives, which may again cause serious pressures on the expenditure budget particularly in an election year, hence again threatening the achievement of the fiscal deficit target. Finally, the targeted receipts from disinvestment of Rs 80,000 crore – if they were to be genuine, and not similar to the ONGC-HPCL transaction – may prove to be difficult to achieve on the back of a high achievement of Rs 100,000 crore projected for this current fiscal year.

One of the key promises made by the finance minister in his 2015-16 budget speech was to rationalise tax incentives/exemptions with a view to reduce the revenue foregone. The government’s statement, presented along with the budget documents such as ‘Revenue Impact of Tax Incentives under the Central Tax System’, shows that large amounts are still being lost to revenues foregone to tax incentives – almost Rs 165,000 crore for direct taxes for 2017-18, and Rs 145,000 crore for indirect taxes for 2016-17 (not available for 2017-18). The finance minister has not been able to deliver on that promise made four years ago; that would have provided a good amount of tax revenues which could have helped achieve the fiscal deficit target.

Key challenges

The key problematic issues in the Indian macroeconomic scenario remain: the sharp decline in the investment to GDP ratio, which has fallen from about 37% in 2007 to just about 27% now; the stagnation in agricultural growth in which there is almost zero growth in the gross added value (GVA) in the last two years; the continuing lack of dynamism in the manufacturing sector and in exports.

All of these have an impact on GDP growth. It is unclear whether the budget on its own has or even can do much to favourably impact these factors resulting in achievement of the projected growth rate of 11.5% of nominal GDP.

Also read: Budget 2018-2019 As It Happened

On the taxation front, the challenges are also clear. The overly-complex Goods and Services Tax (GST) needs simplification, the corporate income tax (CIT) structure needs to be reformed to be able to face growing international tax competition following the US tax reform, and personal income taxation needs to address the growing inequality in India. This budget does not address these fundamental issues. There is no announcement on a reform roadmap on the GST. CIT reforms appear half-hearted, and while providing relief to small and medium-sized enterprises (SMEs), do not address the international tax competition issues. The overall structure of personal income tax (PIT) remains as it was.

Rajul Awasthi was an OSD to Finance Minister between 2004-08. Views are personal.

Can Budget 2018 Set a Road Map For a Truly ‘Good and Simple Tax’?

While the nitty-gritties of GST work are handled by the council, slippage in revenues are a result of poor design, which is why a road map for reforming the GST is needed.

When the GST rate is high, there is an equally high incentive to evade the tax. Credit: Reuters

I don’t envy finance minister Arun Jaitley. The fiscal situation is looking rather grim, with the fiscal deficit target amount for the entire year having already been exceeded by 12 percentage points, with a full quarter of the fiscal year still to go. Goods and Services Tax (GST) revenues, in particular, have been disappointing, with monthly collections down to the Rs 80,000 crore mark from about Rs 95,000 crore in the initial few months.

The situation on the direct taxes front appears to be better in the sense that they may just about meet their targets, but there is little chance that a part of the slippage in GST revenues could be compensated by the income and corporate tax collections. Non-tax revenues such as proceeds from disinvestment will need to play a far greater role if the fiscal deficit target of 3.2% of GDP is still to be met. There are loud rumours that the target could slip this year.

One of the key reasons the GST revenue uptake has been slipping is clearly the fact that to assuage small businesses (voters), a large number of commodities were moved from the 28% bracket to the 18% bracket, and in some cases, even lower tax brackets. In fact, as many as 178 items were moved from the 28% to the 18% slab in the GST council meeting of November 10, 2017. In addition, six items were moved from the 18% tax slab to 5% tax slab, eight items were moved from the 12% tax slab to 5% tax slab and six items were moved from the 5% tax slab to zero percent tax. All of these changes certainly have had a negative impact on revenues from GST.

Also read: Budget 2018: Centre Must Tackle Unfulfilled Promises, Rural Distress as It Walks Fiscal Tightrope

These ad hoc adjustments had to be made because the GST law was so poorly designed in the first place. Several experts, including the government’s own chief economic advisor, had opined that the top rate be kept at a reasonable level, that there not be a large number of rate slabs, that commodities like petroleum, real estate be kept in the GST net and that small businesses be kept out. None of the advice was taken. We have ended up with a hugely complex, difficult to administer and even more difficult-to-comply-with GST.

But apart from the ad hoc reduction of rates, compliance issues have also had a big role to play in the declining collections. The fact is, when the GST rate is high, there is an equally high incentive to evade the tax. There is a concrete example from the European Union (EU). Until 2015, Romania had a high VAT rate of 24%, applicable on the vast majority of goods and services. At that time when Romania had this rate – one of the highest in the EU – its VAT gap, i.e., the amount of VAT lost due to non-compliance, was the highest in the EU at 41.1%. Romania cut the VAT rate to 19% from January 1, 2017. This rate cut followed the 2016 reduction from 24% to 20%. Romania had originally hiked VAT from 19% to 24% in 2010 at the height of the global financial crisis.

In India, not only is the rate of 28% inordinately high, the overall structure of the GST design is overly complex with a number of tax rates. Apart from the standard zero rate on exports, the Indian GST has several other rate slabs: 0.25%, 5%, 12%, 18%, 28%. The zero rate applies not just on exports but on a host of other products such as food items and handicrafts. With this sort of a complex structure, there is always an incentive to try to game the system by looking for loopholes in the law or other means to reduce the amount of GST payable. Even though GST is an indirect tax and in theory, its incidence ought to pass through to the final consumer, the fact is producers and service providers know that if they can succeed in lowering the tax liability, they can offer their goods or services at more competitive prices to consumers.

Apart from gaming the system, non-compliance is also taking the form of outright under-declaration of sales turnover. The rumour is that many retailers are under-declaring as much as 40% of their sales.

In India, not only is the rate of 28% inordinately high, the overall structure of the GST design is overly complex with a number of tax rates. Credit: PTI

One of the ways the administration is planning to deal with this is to subject all interstate transfers of goods to e-way bills, i.e., trucks must carry these e-way bills with them as they cross state borders and then be subject to random checks. First, this will still do nothing to deal with the problem of undeclared services. Moreover, I wonder if this will not reintroduce the old practice of border check posts and long queues at state borders which the GST sought to eliminate. A more effective way may be to introduce real-time online data sharing with the tax administration, as several countries in Europe have done.

Another major problem has been the high compliance burdens faced by small businesses. To ease this burden, the GST law provides for a “composition scheme” where eligible small businesses with sales turnovers up to Rs 1 crore can pay a flat rate of tax on their turnovers. Recent reports suggest that as many as 15 lakh small businesses have registered under this scheme, and about six lakh of them have filed returns and paid tax under it. The total amount of tax collected under this scheme is a paltry amount of Rs 251 crore, and officials are reported to believe there is widespread under-reporting. As I have said in earlier pieces, there is really no merit in forcing lakhs of small businesses with turnovers as low as Rs 20 lakh a year to register for the GST. The revenue collected from them will be very small and the compliance burdens imposed on them relatively very high. It is time to reconsider the threshold limit and revise it upwards to Rs 1 crore.

My recommendation for a tax regime for small businesses is the following: the GST threshold be fixed at Rs 1 crore, with a provision for voluntary registration for smaller businesses; for income tax to continue with section 44AD but bring the ceiling limit back to Rs 1 crore in line with the GST threshold; allow this presumptive taxation only for those taxpayers who are not registered for GST; and, introduce a flat fee in the nature of a “business permit” of Rs 10,000 a year for businesses with a turnover between Rs 20 lakh to Rs 1 crore to be collected by state governments.

Also read: Suresh Prabhu Predicts Sunny 2018 for India Inc While Ignoring Stormy 2017

Data taken from the Report on the Revenue Neutral Rate and Structure of Rates for the Goods and Services Tax, 2015, Ministry of Finance, indicates that the vast majority of potential GST revenue would come from the top two brackets – “above Rs 100 crore” and “between Rs 10 crore and Rs 100 crore”. These two brackets have only 2.2% of taxpayers, but would potentially contribute over 80% of tax revenues. The distribution is highly skewed. In the table in the report, the number of small businesses with turnovers below Rs 1 crore is 8,111,026, which is as much as 86% of all potential taxpayers, however, their total turnover amounts to just 3.4%, which is also likely to be their share in GST tax revenue.

Now, we know that GST rates are decided by the GST Council, headed by the finance minister and comprising representatives of all states, and so it is not possible for Jaitley to directly introduce proposals in the Budget for 2018-19 which would be enacted in the Finance Act, 2018-19. However, it would be excellent if the finance minister presented a road map for reforming the GST with a view to reducing its complexities and making it a truly “good and simple tax”.

Both the minister and his secretary have at various times in the last couple of months indicated their willingness to go in the direction of a simpler GST with a three-rate structure, with a top rate of 18%. This would be most welcome, and I believe would increase voluntary compliance by reducing incentives to evade.

Rajul Awasthi works for the World Bank on tax reforms. Views are personal.

Modi’s Promise of a ‘New India’ Looks Shaky Amid Economic Chaos

With the ripples of demonetisation and a poorly-designed GST spreading economic distress, voters will assess the promise of Narendra Modi’s ‘New India’ in due course.

People associated with the BJP’s ideological parent, the Sangh Parivar, have also started expressing concern over India’s economic trajectory. Credit: PTI

Suddenly, the BJP is feeling besieged by news of economic distress all around. After a badly botched up demonetisation exercise, we are seeing an equally botched up implementation of the GST which has sent small businesses into a tailspin, exacerbating the decline in output and employment seen during the months after demonetisation.

Trading companies were de-stocking before the start of the GST regime on July 1, 2017, in the hope that they would buy up fresh stocks under the new tax system. But given the messy implementation, analysts say the re-stocking process is quite slow and firms would rather wait for the GST system to stabilise before going full swing again. And mind you, all this is happening just before the festive season. This is bound to impact GDP growth in the second half of 2017. As predicted by many, inflation too has marginally gone up post GST. The multi-decade high domestic petrol and diesel prices are not helping matters either. Ironically, record high oil taxes are the only source of stable revenues as they are out of GST. It is India’s oil tax and not GST which is coming to the Centre’s rescue.

To add to finance minister Arun Jaitley’s woes, the sub optimal – perhaps an understatement – working of the GST network (GSTN) has created a major risk of revenue shortfall in 2017-18, putting the Centre’s fiscal arithmetic at risk. The finance ministry got its first shock when the GST refund applications (those seeking refunds after paying tax) totalled Rs 65,000 crore for July when total collections were Rs 95,000 crore.

Also read: Faltering Growth – Will Modi’s Fiscal Push Do the Trick?

If all refunds were allowed, the Centre would be left with just Rs 30,000 crore when actual net collections are budgeted at over Rs 90,000 crore a month on average. Since more refund claims were expected in the first month because of refunds being allowed on older stocks, it is projected that the subsequent months would generate much higher GST revenues. But given serious glitches that have occurred in the software of the GSTN, the entire exercise is in jeopardy this fiscal.

Bihar deputy chief minister Sushil Modi, who heads the newly created committee of state ministers to fix the myriad problems with the GSTN, made a telling comment last week when he said, “We are building a ship while sailing in it”. Clearly, this is an indictment of the Centre which launched the GST without being prepared for it.

Karnataka’s agriculture minister, Krishna Byre Gowda, a member of the new committee, told The Wire that there are several problems with the software of the GSTN which will take at least six months to fix. He said, “At present there are basic issues like businessmen saying they have registered and uploaded returns but our system not showing it. The slowness of the system is causing hardship to users. The system is not yet able to facilitate uploading of invoices and returns at various stages such as GSTR 2 and GSTR 3. And worse, state governments are unable to retrieve data on companies to monitor GST payment.”

Gowda says the committee members have spoken to the software providers in Infosys and “they are saying the procedural protocols were received at the eleventh hour before the kick off date in July. There wasn’t enough time to do trial runs”. So we now fully understand what Sushil Modi means when he says the ship is being built as it is already sailing!

Top Sangh parivar ideologues belatedly admit that the unstable ship is sailing in the already stormy waters caused by demonetisation. S. Gurumurthy, an important economic ideologue of the Sangh parivar, has suggested that the coming together of demonetisation, GST, bank NPAs settlement process and the multi-pronged attack on black money have delivered a huge shock to commerce in general.

Gurumurthy’s admission is very interesting because he was the biggest defender of demonetisation, GST and the taxman’s arbitrary assault on individual entrepreneurs and small businesses in particular. The tax department is not going after the big businesses with whom it is known to enjoy a long-standing cosy relationship. To understand this, you just have to see the number of senior tax officials who quit and join the top 500 companies in India.

Also read: Modi Government’s Defence of High Fuel Prices Is Flimsy

So Sangh parivar ideologues now openly concede that Modi and Jaitley may have thrown the baby out with the bath water. The current phase of GST implementation is the biggest example. Businesses who have paid the GST for July and asked for legitimate refunds are being hounded like criminals. Exporters were always exempted from excise duty earlier because they competed in the global market. Under the GST regime, since all businesses pay the indirect tax as a matter of procedure, exporters were asked to pay 18% GST only to be refunded the same amount forthwith before shipping their consignment abroad. But now exporters are complaining that their tax refunds are not coming in time. Exporters cannot wait as they work in seasons – like shipping for Christmas abroad. Their working capital gets blocked after they pay 18% GST, which is a big amount. They end up paying additionally for borrowing to meet short-term working capital from banks, affecting their narrow profit margins.

Imagine India has close to $300 billion annual exports and this contributes a good chunk to GDP. And the GST authorities appropriating 18% of the export value and not refunding the amount in time is a nightmare for them. This simple equation of quick refund to exporters was not anticipated by the finance ministry. Someone must surely pay for this.

Given the scale of the mismanagement of GST, I will not be surprised if GDP growth in the second half of 2017 goes down even further from the 5.7% recorded in April-June. Indeed, despite BJP President Amit Shah’s bravado that people should ” ignore official statistics” there is panic within the government over the dark clouds gathering around the economy. The scale of value destruction in India’ s informal sector, especially agriculture and small industry has been documented comprehensively. Social media is giving a running commentary backed by data for some months now. An RBI survey of the universe of smaller companies ( turnover less than Rs. 25 crore) shows a 58% fall in their sales in Jan- March 2017. GST would have further added to their distress post July.

Also read: Is the Narendra Modi Bubble About to Burst?

The Mumbai-based research arm of international financial services group , Credit Suisse, recently said the Indian economy is going through a dense fog with several big policy measures like demonetisation & GST creating major disruptions. More worryingly, Credit Suisse says these disruptions are accompanied by a sharp fall this year in overall government spending. Remember in the absence of private investment , public investment was probably the only engine generating some growth so far.

Eighteen months before the 2019 general elections, India’s political economy is in a shambles as Modi continues to make impossible promises to be fulfilled by 2022. The underlying message behind these new promises is that his coming back to power in 2019 is pre-ordained. History informs us that politics invariably evolves in a non-linear fashion. Sands begin to shift from under the feet just after the hubris and popularity of a regime peaks. By the end of 2018, voters will make a realistic assessment as to whether the promise of a ” New India” is for real or yet another bubble destined for the dustbin of Swachh Bharat.

How Did the Finance Ministry Get Such Incredibly Accurate Revenue Budget Estimates?

Were the budget estimates for corporation and income taxes in 2016-17 a typographical error or have they been carefully massaged?

Were the budget estimates for corporation and income taxes in 2016-17 a good coincidence or were they supposed to have been be qualified with a note?

Budget miscalculations? Credit: Reuters

New Delhi: For the first time in at least ten years, the budget estimates (BE) of India’s corporate tax and income tax revenue receipts have exactly matched their corresponding revised estimates (RE) – give or take a couple of decimal points.

A key part of every Union Budget is the receipt budget, a quick summary of how much tax and non-tax revenue the government was able to collect over the last year. It also includes capital receipts.

While tax revenue is further broken down into ten different categories, the two biggest sources of this revenue are ‘corporation taxes’ and ‘taxes on income’. The receipt budget for 2017-18 breaks down the 2016-17’s budget estimates and revised estimates for all tax revenue receipts.

For 2016-17, the budget estimate (BE) for corporate tax revenue was Rs 4,93,923.55 crore. The revised estimate (RE) is Rs 4,93923.50. That’s a difference of less than one crore rupees. Corporation tax revenue is broken down into four categories – collections, surcharge, education cess and miscellaneous receipts.

For 2016-17, the BE for taxes on income – which includes collections and surcharges as well as a whole host of other taxes including the security transaction tax – was Rs 3,53,173.68 crore. The RE for the same category in the same year is Rs 3,53,173.70. Again, a difference of less than one crore rupees.

Financial Year	Corporate Tax Receipts (Rs crore)		Income Tax Receipts (Rs crore)
	(Budget Estimate)	(Revised Estimate)	(Budget Estimate)	(Revised Estimate)
2016-17	493923.55	493923.50	353173.68	353173.70
2015-16	470628.00	452969.68	327367.00	299051.24
2014-15	451005.00	426079.00	284266.00	278599.00
2013-14	419520.00	393677.00	247369.00	241691.00
2012-13	373227.00	358874.00	195786.00	206095.00
2011-12	359990.00	327680.00	172026.00	171879.00
2010-11	301331.00	296377.00	128066.00	149066.00
2009-10	256725.00	255076.00	112850.00	131421.00
2008-09	226361.00	222000.00	138314.00	122600.00
2007-08	168401.00	186125.00	98774.00	118320.00

A quick look at the differences between BE and RE over the last two years, for these two revenue receipt categories, shows that usually the BE is off by anywhere between Rs 5,000 crore (in a handful of cases) to Rs 20,000-30,000 crore.

“This is certainly unusual. I don’t think I’ve seen this before, where both corporate tax and income tax almost exactly match up,” said a senior economist, who has helped formulate previous Budgets.

What explains these extremely accurate budget estimates for 2016-17? Multiple economists The Wire spoke to pointed out that there were a handful explanations. The simplest reasons include it being an error or a coincidence – and that the “actuals for 2016-17” that will come out next year will be different.

Another explanation is that because the Budget was moved up (and its date was in doubt due to other issues such as the Election Commission’s verdict), the revised estimates might not be as accurate as it was for other years.

“There could be some factors, such as not knowing how much revenue the second income disclosure scheme will come in and so on. Moving up the Budget date might not have helped. However, in this cases they should really have put an asterix on these numbers and qualified it through a note at the end of the document, saying that the calculations came out like this because there is some uncertainty,” a former chief economic adviser told The Wire.

Yet another explanation is that the numbers are just downright wrong or have been massaged. The head of a finance policy think-tank told The Wire that some numbers should be ideally taken with a “pinch of salt”.

“A 1 crore difference? Are you kidding me? After the budget came out I called up and spoke with finance ministry officials and they said that they are sticking by these numbers. Some of these numbers, in most Budgets, you can’t take just at face-value and this is largely known,” the think-tank head’s said.