IMF raises doubts about India's tax revenue estimates, GDP growth target

Gross actual (direct plus indirect) tax collection in 2018-19 fell short by Rs 1.7 trillion, or 7.5 per cent of the revised estimates for the year

The International Monetary Fund (IMF) has posed questions for policymakers in India over steep tax revenue collection estimates for 2019-20 and the bottlenecks in the goods and services tax (GST) regime.

Working on the country’s annual economic surveillance or assessment report, the Washington-based multilateral institution has asked India to explain how it is confident of meeting its revenue estimates for the year, given the current state of economic growth and historical buoyancy.

Despite a cut in tax projections for the year in the July Budget over what was given in the Interim Budget due to lower than expected realisations in the previous year, tax revenues are estimated to grow by 25 per cent year-on-year.

Gross (direct plus indirect) tax collection in 2018-19 fell short by Rs 1.7 trillion, or 7.5 per cent of the revised estimates for the year. The current economic downturn further amplifies challenges of tax collection.

“Across the board, economic slowdown will affect tax collection, which is already projected to be unreasonably high,” said a government official.

India has to respond to the IMF this week. The IMF has monitored economies and associated provisions of policy advice to identify weaknesses that could lead to financial or economic instability. 

Under Article IV of the IMF’s Articles of Agreement, an IMF team of economists visits a country to assess economic and financial developments and discuss policies with officials in government and the central bank. It is an annual affair.

In its latest monetary review, the Reserve Bank of India cut the country’s growth projection for 2019-20 to 6.9 per cent from its June forecast of 7 per cent, on account of demand and investment 

slowdown.

The International Monetary Fund (IMF) last month lowered the growth estimate for India by 30 basis points for the current as well as the next financial year to 7 per cent and 7.2 per cent, respectively, owing to weaker than expected domestic demand. Even the Asian Development Bank in July cut India’s growth forecast to 7 per cent.

As for direct taxes, growth in collection up to mid-August has been 4.69 per cent, as against the full-year target of 17.3 per cent.

With visible signs of slowdown in the consumer durables and non-durables segments, including auto and biscuits, tax officials appear less than confident of achieving the target.

The government is expecting a buoyancy rate of 1.2 in direct taxes, which means that if the economy expands by 10 per cent in nominal terms, tax collection will grow by 12 per cent. Economic growth in FY19 had slumped to a five-year low of 6.8 per cent and a 20-quarter low of 5.8 per cent in the January-March quarter of 2018-19.

According to reports, Parle, leading biscuit maker, may lay off up to 10,000 workers. The auto sector, too, is facing a slump.

The Budget has projected GDP (at current prices) growth of 12 per cent in 2019-20. Even if GDP at constant prices grows by 7 per cent, economic expansion at current prices will not be 12 per cent because the inflation rate is far lower than 5 per cent, with the latest number standing at just 3.15 per cent for July.

“Broad sentiment suggests economic growth may be lower, between 10 per cent and 11 per cent. This will mean direct tax collection will be 12-13 per cent,” said a senior government official.

In a commentary on the IMF’s previous country report for India, its mission chief for the country, Ranil Salgado, described the economy as an elephant that had started running. However, it had pegged India’s growth at 7.3 per cent for 2018-19. The growth rate turned out to be much lower at 6.8 per cent for the year, the lowest in the previous government.