With tax revenue collections falling short of budget estimates, there is a need for the govt to reconsider its ambitious targets and reform the tax system
The revenue projections for fiscal 2020, made by the government in its interim budget earlier this year, received one feedback from analysts: “too ambitious”.
The government’s track record in raising tax revenues does not inspire too much confidence in its ambitions. Instead, it raises fears of overzealous taxmen raising arbitrary demands to meet unrealistic revenue targets.
Over the past few years, the actual tax collections of the Union government has witnessed a significant slowdown, notwithstanding the rosy projections made in each budget, even as complaints of ‘tax terrorism’ have resurfaced.
After briefly shooting up to a six-year high of 17 percent growth (compared to the year-ago period) in the year of demonetisation, the growth in total tax revenue collected slowed down to sub-average growth of 11 percent and 8 percent in the following two years.
The underwhelming growth in indirect tax collections under the Goods and Service Tax (GST) regime has been the primary contributor to this slowdown. Despite an improvement in indirect tax base following the implementation of GST, the centre’s total indirect tax collections in the post-GST era show a marked decline.
Indirect tax collections (accruing to the centre) grew by only 2.7 percent in fiscal 2019, much slower than the relatively subdued 6.3 percent growth seen in fiscal 2018. The growth in aggregate indirect tax collections of the centre and states has also declined after the introduction of the GST, data shows.
Prior to the GST rollout in July 2017, the centre’s indirect taxes mainly consisted of customs duties, excise duties and service tax, almost in equal proportion. Now, more than 60 percent of centre’s indirect tax revenue comes from GST. The collections under GST have consistently fallen below the rates required to meet the annual targets set by the government.
As per the latest data released by the Controller General of Accounts (CGA), GST collections undershot the annual target set by the government at the beginning of the financial year by Rs 1.6 lakh crore in 2018-19. The shortfall was a little over Rs 2,000 crore in the preceding year.
While there was a spurt in the growth of direct tax collections in the year of demonetisation and the following year, it slipped in 2018-19 according to the provision tax receipt figures published by CGA. The average growth in direct tax collections over the past five years was 12 percent compared to an average of 15 percent under the UPA II government (2009-2014).
Recent years have however witnessed an improvement in the buoyancy of direct taxes (or the extra taxes generated by growth of output) but it is worth that the increase is not unprecedented.
When it comes to the tax base, there does not seem to have been a sustained increase despite extraordinary steps taken by the government such as the income disclosure scheme followed by demonetisation in 2016-17. While the number of taxpayers jumped in the assessment year 2016-17 on the back of these moves, growth has fallen back to the usual levels after that.
The first quarter of the current fiscal year has seen a sharp rise in the advance tax numbers but it is too early to tell whether this reflects a turnaround in economic activity or the success of overzealous taxmen.
“Tax authorities have in general been more aggressive in their tax collection methods in the last couple of years,” said Amit Maheshwari of Ashok Maheshwari and Associates, an accounting and tax consultancy.
According to a 2017 audit report of the Comptroller and Auditor General of India (CAG), the income tax department had raised exaggerated demands to achieve its revenue collection targets by resorting to “irregular" and “unwarranted" methods. The demands so collected were refunded with interest in the next fiscal, which eventually put a heavy financial burden on the exchequer.
The same report pointed out that the amount locked up in tax appeals at tribunals, high courts and the Supreme Court increased from Rs 3 lakh crore in 2015-16 to Rs 4.4 lakh crore in 2016-17. An overwhelming majority of the cases in tribunals and courts are decided in favour of the assessee, the report noted.
It is not surprising therefore that complaints of ‘tax-terrorism’ have resurfaced in recent years, as the lack of transparent tax administration coupled with unrealistic revenue targets have led to a renewed aggression in tax demands.
Such aggressive tax moves could have contributed to the slowdown in the economy by hurting investor sentiment, according to some economists.Unless the revenue projections in the next budget are set realistically, and long pending reforms in tax administration are taken up quickly, the rampaging tax bureaucracy could further dampen investment sentiment and growth.The Great Diwali Discount!
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