Unprecedented Tax Revenue Generation Augurs Well For Indian Economy

India is in the middle of an unprecedented tax revenue generation cycle. Actual collections data from the office of the Controller General of Accounts indicate that financial year 2022 (FY 22) tax collections are on track to beat not just the Covid-19 pandemic-struck FY 2021 but also that of FY 2020, a regular growth year.

Indeed, the FY 2022 Union Budget may have conservatively computed tax collections compared to the actual collections data from FY 2021 itself.

Table 1 shows actual collections data in FY 2020, FY 2021 and between April and October in FY 2022 for the gross tax revenue (GTR) and large tax headings like corporation, income, central goods and services (CGST), GST compensation cess, customs and excise duties.

The estimated totals for FY 2022 are computed by adding the actual April-October collections to the actual November-March collections of FY 2021. These are conservative estimates since they are based on the pandemic year collections and not the high-velocity growth of FY 2022. It also includes the FY 2022 budget estimates headings, allowing for a direct evaluation.

Gross Tax Revenue Might Exceed Budget Expectations By As Much As Rs 4 Lakh Crore

Tax collections from April-October in FY 2022 are undoubtedly off to a solid start. Actual collections of GTR in FY 2022 are Rs 13.64 lakh crore, compared to Rs 8.76 lakh crore in FY 2021 and Rs 10.52 lakh crore in FY 2020 in the same period.

A conservative estimate for FY 2022 totals by adding the FY 2021 November-March collections of Rs 11.5 lakh crore is Rs 25.1 lakh crore in GTR. This indicates nearly Rs 3 lakh crore over the budget estimate of Rs 22.2 lakh crore.

An analysis of individual tax headings indicates it could be even higher:

Corporation Tax (CT) — April-October FY 2022 collections of CT is Rs 3.3 lakh crore, a 92 per cent increase over the same last year. Adding to this Rs 2.85 lakh crore estimated from November-March FY 2021 shows a conservative estimate of Rs 6.15 lakh crore total in FY 2022. This is Rs 68,330 crore higher than the budget estimate of Rs 5.47 lakh crore.

March collections of corporation tax (Table 2) over four years shows CT for March FY 2021 was the lowest it’s been — this is due to the high volume of refunds processed.

If the 92 per cent increase in current CT is applied for March as well, it would be Rs 2.05 lakh crore. If not that much, CT will at least hit the FY 2019 peak of Rs 1.9 lakh crore which is a delta of Rs 80,000 crore from the March FY 2021 CT collection. This means, total CT for the year could well be Rs 1.5 lakh crore over the budget estimate of Rs 5.5 lakh crore.

Income tax — actual income tax collections for April-October FY 2022 is Rs 3.11 lakh crore. A similar analysis where the November-March FY 2021 collections of Rs 2.7 lakh crore are added shows estimated income tax collections could be Rs 5.77 lakh crore — Rs 16,400 crore higher than the budget estimate. The current run rate could generate much higher income taxes as well.

GST collections — per the same conservative analysis, CGST too may increase by Rs 36,000 crore. Moreover, GST collections in the past few months is trending over Rs 1.3 lakh crore (Rs 1.34 lakh crore in October, Rs 1.31 lakh crore in November).

Assuming this run rate holds for December-March, GST collections for the remaining November-March of FY 2022 will yield Rs 6.5 lakh crore. Removing Rs 50,000 crore for compensation cess, Centre gets 50 per cent of the balance Rs 6 lakh crore — Rs 3 lakh crore, which is Rs 50,000 crore above last year’s collections.

In fact, this number may still be on the lower side since October and November GST figures were dampened by the global chip shortage that is hampering the automobile industry which is 40 per cent of India’s manufacturing sector. Sales are picking up now, which will generate higher GST collections.

Customs and excise duties — actual customs and excise duty collections for April-October FY 2022 are Rs 1.12 lakh crore and Rs 2.04 lakh crore respectively. A similar analysis as above shows estimated total collections could be Rs 1.96 lakh crore and Rs 4.33 lakh crore respectively — leading to Rs 60,000 crore and Rs 1 lakh crore over the respective budget estimates.

However, due to the reduction of fuel taxes in November, Rs 45,000 crore must be removed from excise duties — now totalling Rs 55,000 crore over the excise duty budget estimate.

Due to all these upward indicators, gross tax revenues might exceed budget expectations by nearly Rs 4 lakh crore. Of this, 58 per cent of all tax heads (except for customs of which 100 per cent) will supplement the central government’s net availability, which could be Rs 2.52 lakh crore.

Non tax revenue (NTR) — NTR consists of dividends and other revenue from various services. Reserve Bank of India’s (RBI’s) transfer of surpluses has already increased from the budgeted Rs 53,500 crore to Rs 99,100 crore — a difference of Rs 45,600 crore. With an expected increase in dividend flows from oil companies with higher profits, total NTR could exceed budget estimates by Rs 75,000 crore.

Non debt capital receipts (NDCR) — NDCR is budgeted at Rs 1.88 lakh crore for FY 2022, which consists of the scheduled initial public offerings (IPOs). Even if the disinvestment of either LIC (Rs 1 lakh crore) or BPCL (Rs 75,000 crore) doesn’t take place, the increase in NTR of Rs 75,000 crore will be adequate to take care of the shortfall.

Excess Can Be Utilised To Close Past Liabilities And Move Ahead Unencumbered

Government’s gross tax revenues could well increase by Rs 4 lakh crore over the budget estimates. Of this, Rs 2.52 lakh crore will be available for the Centre’s additional expenditure. Two supplemental demands have already been laid, of which the net additional cash outgo together is estimated at Rs 3.2 lakh crore (Rs 23,675 crore+ Rs 2,99,243 crore). This massive expenditure increase includes Rs 50,000 crore for food subsidies, Rs 58,430 crore for fertiliser subsidies, Rs 53,000 crore for pending export incentives, Rs 65,000 crore to Air India, Rs 22,000 crore for MGNREGA, and a host of other items that will ensure a comprehensive cleanup of past liabilities.

The government can meet this excess expenditure (Rs 3.2 lakh crore) due to the buoyancy in tax revenues (Rs 2.52 lakh crore), leaving a possible deficit of Rs 70,000 crore. This deficit might be offset by potential last-minute savings or increase in revenues. Studies also indicate that the GDP might reach Rs 228 lakh crore against the budgeted Rs 222 lakh crore.

Budget 2020-21 already contained one massive cleanup of past liabilities. The borrowings from the National Small Saving Fund by the Food Corporation of India were taken over by the Union government in the Budget, which resulted in the food subsidy ballooning much higher than the budget estimates.

The excess collections over the revised estimates last year were also used to take over other such liabilities which were budgeted for FY 2022. These one-time payments thus showed up in the government budget, leading to an apparent increase in fiscal deficit to 9.2 per cent. As this was a one-time cleanup, FD has since decreased to 6.8 per cent in FY 2022.

Hopefully with the current cleanup in FY 2022, FY 2023 revenues bolstered by expected tax buoyancy and a massive reduction in one time expenditure in FY 2022, can be utilised for meeting accelerated infrastructure development and current expenditure demands (of FY 2023) instead of past liabilities. This augurs well for the Indian economy that can now shake off past burdens and focus on higher economic growth this decade.

The unprecedented revenue generation could also allow the government to rearrange the tax slabs and bring some relief to the long-suffering middle class. People have lost jobs and depleted savings during the pandemic, as many have incurred unexpected healthcare costs. They have struggled with barely any government relief but have still paid increased taxes. Some consideration by rearranging the tax slabs, reducing taxes, and simplifying the process will demonstrate the government’s recognition of their suffering.