Budget 2022: India Set To Overshoot Its Tax Targets For The First Time In Four Years
After four years of setting ambitious tax targets and missing them, a more grounded assessment in the Union Budget for 2021-22 seems to have paid-off for the Indian government.
Conservative tax revenue targets and better-than-expected nominal GDP growth will help India in surpassing its budgeted estimates for the first time since 2018.
In the first eight months of 2021-22, India had earned net tax revenue of Rs 11.3 lakh crore—65% higher than last fiscal and 73.4% of its Rs 15.4 lakh crore budget estimate, according to the government's monthly accounts. The gross tax revenue collections during the same period stood at Rs 15.4 lakh crore—69.4% of the Rs 22.1 lakh crore target.
Tax collections tend to rise in the last quarter of the year. On average, over the last 12 years, net tax collections between December and March were 93.6% of the total amount collected in the months between April-November. This year, the government needs to collect just 36% of the amount collected so far to meet its target.
More realistic targets mean better credibility. And some want the trend to continue in the upcoming budget.
Conservative estimates in the FY22 budget were "very different from some previous years when very ambitious tax revenue estimates eroded the credibility of the budget instantly as it was announced," wrote HSBC Chief Economist Pranjul Bhandari in a pre-budget note. "It may be a good idea to stick to conservative tax revenue estimates this year as well, especially because there are huge uncertainties on the growth front."
A breakdown of the tax data shows that the share of corporate tax has been declining. Part of this is attributable to the cut in corporate tax rates announced in September 2019. The share of income tax and GST collections has remained largely stable despite the pandemic blip.
In the first eight months of FY22, corporate tax contributed 22.9% to the overall gross tax collections. This compares to a peak of 31.9% in FY19. Income tax collections make up 22.45%. Excise and customs duties have seen an increase in share in the overall tax kitty.
Taxes And The Economy
The central government's revenue from taxes this fiscal saw a boost due to higher-than-expected nominal GDP growth. The government had budgeted for a 14.4% rise in nominal GDP. However, advance estimates showed that the nominal GDP grew at 17.6% in the current fiscal.
As a result, India's tax buoyancy—a measure of tax collected per unit of nominal GDP—has also jumped. In the first half of FY22, tax buoyancy was at 2.7, according to EY India, more than double of what was budgeted.
According to BloombergQuint's calculations based on a range of economist estimates, buoyancy for FY22 is expected to come around 1.6-1.7.
Higher buoyancy will continue in the coming year as well, Ananth Narayan, Associate Professor at SP Jain Institute of Management & Research, told BloombergQuint. "Of course there is uncertainty because of Omicron but given the formalisation we have seen, I think we can pencil in 20% growth in tax revenues next year."
Momentum To Continue?
Most economists agree that the continued recovery in GDP will sustain tax collections. However, growth in tax revenue next fiscal is likely to be slower than in FY22.
That is because nominal GDP growth of 12-15% likely according to various estimates, is lower than what was seen in FY22. Besides, the government has reduced excise duties on fuel from November 2021, which will moderate collections from that source.
Jefferies said that net tax revenue growth seen in FY22 will be a "tough act to follow" amid the uncertain growth outlook. Bank of America Merrill Lynch, on the other hand, estimates that tax revenue will inch lower due to expected tax sops in the Union Budget.