Budget 2021-22 Underestimates Taxes For Financial Years 2021 And 2022

Finance Minister Nirmala Sitharaman appears to have been conservative in estimating the Centre’s gross tax revenue (GTR) collections for financial year (FY) 2020-21 and FY 2021-22.

The budget estimates (BE) of the Centre’s GTR for FY 2020-21 was Rs 24.23 lakh crore, which was revised downwards to Rs 19 lakh crore during the 2021-22 budget presentation in February 2021.

This revised estimate (RE) for 2020-21 is lower than the actual GTR of Rs 20.10 lakh crore collected in FY 2019-20.

The government has collected about 80 per cent of the RE 2020-21 GTR this year between April 2020 and January 2021, as compared to 71 per cent of RE 2019-20 GTR collected from April 2019 to January 2020.

The GTR collected this year up to January 2021 is Rs 15.15 lakh crore, which is marginally lower than Rs 15.31 lakh crore collected up to January 2020.

The actual GTR collection in February and March 2020 cumulatively was Rs 4.79 lakh crore whereas the GTR to be collected in February and March 2021 is only Rs 3.85 lakh crore to meet the RE 2020-21, as indicated in the table below:

Amount in Indian Rupees

GTR of Rs 3.32 lakh crore was collected in March 2020, despite being a bad month for tax collection. The GTR collected in FY 2019-20 was 7 per cent lower than the RE 2019-20.

This was primarily due to tapering down of economic activity and the transition to Bharat Stage VI by the auto industry, which forms about 49 per cent of the manufacturing industry.

The tax collection in the months of February and March and the percentage to actual tax collection in FYs 2017-18, 2018-19 and 2019-20 are as follows:

Amount in Indian Rupees

From the table above, it is apparent that the amount of taxes to be collected during the months of February and March 2021 to meet the RE 2020-21 is lower than the amounts collected in February and March of the previous years.

Corporate profits for the September 2020 quarter were at an all-time high which was subsequently surpassed by higher corporate profits in December 2020 quarter.

This is evidenced by the highest corporate tax collection in December 2020 at 1.27 lakh crore. This is 57 per cent higher than the corporate tax collection of Rs 0.81 lakh crore in December 2019.

The income tax collected during October-December 2020 was Rs 1.31 lakh crore compared to Rs 1.05 lakh crore in October-December 2019.

The corporate tax and income tax collected in the December quarter of FY 2020-21 is higher than the amount collected in the December quarter of FY 2019-20 by 30 per cent.

In the case of goods and services tax (GST), the government has already collected about 88 per cent of the RE 2020-21 GST up to January 2021, as compared to 81 per cent of the RE 2019-20 GST collected up to January 2020.

The gross GST revenue collected in February 2021 is Rs 1.13 lakh crore, 7 per cent higher than the GST revenues of February 2020.

The GST collections in February 2021 exceeded Rs 1 lakh crore for the fifth consecutive month and crossed Rs 1.1 lakh crore for the third time in a row post Covid-19 pandemic, supported by economic recovery and improved compliance.

Since the February 2021 collection is already higher, we estimate the total collections in February and March 2021 to be about Rs 1 lakh crore, exceeding the RE 2020-21 GST by about Rs 40,000 crore.

The monthly GTR over the four months from October 2020 to January 2021 is higher over the corresponding period in FY 2019-20, by an average of 27 per cent. Applying the average increase of 27 per cent, the total GTR during February and March 2021 could be about Rs 6.08 lakh crore, resulting in an increase in GTR collection over RE 2020-21 by Rs 2.25 lakh crore.

Consequently, actual tax collection in FY 2020-21 could be about Rs 21.25 lakh crore.

The higher tax collection during this year will have an impact on the budgeted estimates (BE) for the next year.

The BE 2021-22 GTR is Rs 22.17 lakh crore, an increase of about 17 per cent over revised estimate (RE) 2020-21 GTR. Assuming the actual GTR in FY 2020-21 to be Rs 21.25 lakh crore, the increase in BE 2021-22 GTR over RE 2020-21 GTR may be only 4 per cent. The nominal GDP growth rate for FY 2021-22 is estimated to be 15 per cent.

The GTR for FY 2021-22 could increase to Rs 24.44 lakh crore, if we factor in the nominal GDP growth rate on the actual GTR collection this year.

Increased economic activity would bring in more taxes this year and next year. It is suggested that the government should use the extra tax collection this year to pay GST dues to states, and repay all pending GST, corporate and individual tax refunds to taxpayers till at least February 2021 so that there will be no hangover of past refunds in the next year.

The government should settle all incentives for exports, full subsidy claims and backlog of spending for infrastructure and defence so that it can start the new fiscal year on a clean slate.

The government should continue the borrowing programme announced in budget 2021 and not cut it down. This will improve the quality of government spending next year and impact growth positively.

This article first appeared in the Financial Express and has been republished here with permission.

T.V. Mohandas Pai is Chairman, Aarin Capital Partners, and S. Krishnan is a Tax Consultant.