The Centre's prospects of meeting its fiscal deficit target of 5.9 percent of GDP for the current financial year have brightened rather considerably over the last few days, with direct tax collections – both corporate and personal income tax – rising massively, and unexpectedly, in August.
According to data released on September 29, corporate tax collections in August surged more than five times from the same month last year to Rs 62,817 crore, while personal income tax collections more than quadrupled to Rs 1.03 lakh crore. Gross tax collections, at Rs 2.95 lakh crore, were nearly twice as high as the corresponding month last year.
Also Read: India's April-August fiscal deficit widens to Rs 6.43 lakh crore
"The picture relating to government finances has undergone a significant change with the publication of the gross tax revenue tax data for the month of August," Sunil Kumar Sinha and Paras Jasrai of India Ratings wrote in a note.
The change in the cumulative numbers is indeed significant. Latest data shows, year-on-year growth in corporate tax collections jumped to 15 percent in April-August from -10 percent in April-July. Similarly, personal income tax collected in April-August is 36 percent higher from last year as against a growth of just 6 percent in April-July.
"While we did not expect tax growth to be as low as it was until July, this level of improvement was also not anticipated," remarked Namrata Mittal, Chief Economist at SBI Mutual Fund.
All in all, the Centre's net tax revenues were a huge 553 percent higher in August, pushing the growth rate for April-August to 15 percent.
Reasons and a caveat
Why the sudden increase in direct tax collections in August? According to Sinha and Jasrai of India Ratings, the rising wholesale inflation number may have had an impact here.
"GDP deflator responds more to WPI than to CPI and as deflation in WPI started receding, we have begun to witness its impact on Union government finances via higher gross tax revenue collection," they said.
Wholesale Price Index (WPI) inflation has been in negative territory in every month of 2023-24 so far but rose to -0.52 percent in August from June's seven-and-a-half-year low of -4.18 percent.
At the same time, the Centre's August net tax collections received an artificial boost from a low base of sorts.
In August 2022, the Centre had made its first 'double instalment' of tax devolution to states for 2022-23, amounting to Rs 1.17 lakh crore. However, in 2023-24, this first 'double instalment' was made in June itself.
The Central Government releases tax devolution to states in 14 equal instalments every year. As such, this involves two months where the instalment is double the usual monthly amount. While these double-instalment months normally came at the end of the financial year, after the Centre had greater clarity on its finances, over the last two or three years it has progressively brought them forward due to improving finances.
Transfers to states reduce the Centre's net tax collections.
In August, the Centre transferred Rs 72,961 crore as tax devolution to states, 37 percent lower than August last year. Despite this, tax devolution in April-August has been 20 percent more than the corresponding period last year at Rs 3.82 lakh crore.
Improving outlook
To be sure, economists remain wary.
"August could be an anomaly rather than a rule given that nominal growth is in single digits. We would watch the tax trends for a few more months to assess the comfort or pressure in the government's finances," SBI Mutual Fund's Mittal said.
The budget had assumed nominal GDP growth of 10.5 percent in 2023-24. But latest data from the government seems to suggest collections are chugging along nicely, with net tax collections as of September 16 standing at Rs 8.65 lakh crore, up 24 percent year-on-year, much higher than what the budget had estimated.
As per the 2023-24 budget, the growth in gross, net, corporate, and personal income tax collections forecast this year from what was collected in 2022-23 was 10.1 percent, 11.1 percent, 11.7 percent, and 11.4 percent, respectively. However, the jump in collections in August was such that the required growth rate in September 2023-March 2024 to meet the Budget estimate is 6.8 percent for gross tax collections, 9.3 percent for net tax collections, 10.6 percent for corporate tax collections and -0.4 percent for personal income tax collections.
"If the current trend of revenue is sustained, we see no fiscal slippage despite the expected shortfall in disinvestment revenue (Rs 35,000 crore)," Elara Capital said in a note on October 3.
According to Elara Capital, the disinvestment shortfall will be comfortably made up by extra non-tax revenues – which, at Rs 1.01 lakh crore in April-August, is already at 69 percent of the 2023-24 estimate thanks to a huge dividend from the Reserve Bank of India.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
