As the central government gears up to present the full Budget for 2024-25 on July 23, the focus is on tax revenue forecasts for the ongoing fiscal.
With the Budget expected to deliver more on welfare, the need for accurate revenue projections in order to design public expenditure better is greater.
For the past few years, actual tax collections have surpassed the government’s revenue forecasts, prompting analysts to stress the critical role of precise projections in optimising public expenditure.
Lekha S Chakraborty, Professor at the National Institute of Public Finance and Policy, said that the government needs to estimate tax collection targets more accurately to plan public spending better.
"This question is about the fiscal marksmanship of the Ministry of Finance. The government should increase the tax targets this year. If the revised tax estimates are greater than the Budget estimates, that's not a matter to celebrate if the projection models underestimate the tax target stance. The sub-optimal tax target stance is also about the fiscal space foregone, which otherwise would have been there to design public expenditure better," Chakraborty said.
Overshooting the target
In FY22 gross tax revenues overshot the Budget target of Rs 25.16 lakh crore by a whopping Rs 5 lakh crore. The year after that also saw the mop-up at almost Rs 3 lakh crore more than the Budget target, though it was closer to the revised projection of Rs 30.43 lakh crore in 2022-23.
For FY24, the revised aim for gross tax collections has been pegged higher than the Budget aim by over Rs 76,000 crore.
Direct tax collections in 2023-24 grew nearly 18 percent to Rs 19.6 lakh crore, surpassing the revised target by Rs 13,000 crore and exceeding the Budget estimate by more than Rs 1.3 lakh crore.
Out of this, personal income tax mop-up rose by 25.2 percent, more than double the 10.3 percent growth rate for corporate taxes.
A similar trend was seen in FY23. Direct tax collections for the year exceeded the revised target by Rs 9,000 crore and grew 34 percent more than the initial Budget estimate.
Ranen Banerjee, Partner and Leader, Economic Advisory PwC India said the government should focus on realistic tax estimates to ensure better Budget outturn. “We should neither make very optimistic nor very conservative tax estimates as it can lead to sub-optimal fiscal outcomes.”
Banerjee added that the government might assume higher growth in tax collections in the FY25 full Budget given that the original estimates for 2023-24 have been exceeded by a significant margin and high-frequency indicators suggest continuing momentum in the economy.
FY25 projections
In the interim Budget, India's gross tax revenue for 2024-2025 is estimated at Rs 38.31 lakh crore, up 11.45 percent from the revised target for this fiscal year of Rs 34.37 lakh crore, while in net terms it is pegged at Rs 26.01 lakh crore, up 11 percent.
Unlike the past few years, when pre-Budget discussions focused on predictability in taxation, this time, there are heightened expectations for tax relief for the salaried class. The government is said to be considering various options, from increasing the basic exemption limit under the new tax regime to Rs 5 lakh from Rs 3 lakh to providing relief to those earning up to Rs 15 lakh.
This has seemingly been a result of a weakened mandate for the ruling Bharatiya Janata Party in the 2024 general elections, which has sharpened calls for more consumer-centric measures.
The full Budget is expected to balance fiscal prudence with targeted welfare measures, as India is seen meeting or even bettering the deficit target of 5.1 percent of gross domestic product for FY24 while ensuring funds for higher spending.
And, more accurate projections for tax collections at the Budget stage itself could be key to achieving this balancing act.
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