Tax collections, dole outgo may be hit

The International Monetary Fund on Tuesday cut its estimate of India’s economic growth (at market prices) in the current year from 5.6 per cent to 3.75 per cent. This means slowing economic growth is likely to impact collection of indirect taxes and raise outgo on subsidies, due to underrecoveries of oil marketing companies, higher food subsidies, etc, economists said.

The IMF estimate of growth in gross domestic product (GDP) at market prices for 2013-14 was lower than its projections of 4.25 per cent expansion in GDP at factor cost for the year. GDP at market prices takes into account indirect taxes and excludes subsidies.

Economists said the difference in the computations could be on two fronts — indirect taxes and subsidies. This means, if indirect tax collections are huge and subsidies subdued, GDP growth at market prices would be higher than its counterpart at factor cost.

Thomas Richardson, senior resident representative for India at the IMF, told Business Standard, "Whenever subsidies are growing as a share of factor cost output, or indirect taxes are falling, the growth rate of GDP at factor cost will be higher than the growth rate of GDP at market prices."

What IMF is probably trying to say is, they do not believe Finance Minister P Chidambaram would be able to contain the subsidy bill, said Pronab Sen, chairman of the National Statistical Commission. He added he did not think the problem lay in indirect tax collections but was more related to subsidies.

IMF also pegged inflation based on retail prices at 11 per cent in 2013. High inflation would increase the nominal size of GDP, which could boost some indirect taxes. However, Sen said the important thing is to know the source of inflation to gauge the impact on taxes. “When we talk of relating indirect tax collection with inflation, it is also important to know the source of inflation. In this case, the food inflation is resulting in high inflation and hence, in such a case, indirect tax collection is estimated to be low.”

Low tax collection could be a reason behind the lower IMF-computed growth projection.

"This points to lower indirect tax collection in 2013-14", said Madan Sabnavis, chief economist at CARE Ratings.

In the first quarter in 2013-14, GDP at market prices grew 2.4 per cent against 3.4 per cent in the same period of 2012-13.  In 2012-13, this grew at 3.2 per cent. Hence, by IMF's computation, there will be a rise in growth this year. This, economists said, meant there could be a slight rise in indirect tax collections in the current financial year compared to  2012-13 but it  would not be as high as the expectations are.

Indirect tax collections grew by 4.1 per cent in the April-August period. The finance ministry had targeted Rs 5.65 lakh crore of indirect taxes for 2013-14, up 19 per cent from the Rs 4.73 lakh crore in the previous year.

Similarly, major subsidies were estimated 10.8 per cent lower atRs 2.2 lakh crore for FY14 against Rs 2.5 lakh crore the previous year. However, analysts believe the government will not be able to contain the petroleum subsidy at Rs 65,000 crore in the current financial year against almost Rs 97,000 crore in the previous financial year. They pegged petroleum subsidies at a  minimum Rs 1.2 lakh crore. Similarly, food subsidy could be higher than the Rs 90,000 crore estimated in the Budget for the current financial  year.