PMO, FinMin to discuss revenue position and ways to augment receipts

Senior officials of the finance ministry are expected to brief their counterparts in the Prime Minister’s Office (PMO) on Monday regarding the Centre’s stressed revenue position and ways to augment receipts at a time when the Indian economy is on track for a contraction due to the Covid-19 pandemic.

The possible measures that could be discussed include further rationalising rates through re-positioning some items in the inverted duty structure by the Goods and Services Tax (GST) Council, recovering amounts stuck in disputes, and, on the non-tax side, seeking higher dividends from state-owned companies and banks and the Reserve Bank of India (RBI), and completing divestment plans, a senior government official told Business Standard.

It is learnt that Chief Economic Advisor Krishnamurthy Subramanian will give a presentation to PMO officials, including P K Mishra, principal secretary to the prime minister, on the subject. Top planners in the finance ministry are expected to attend the meeting. They include Finance Secretary Ajay Bhushan Pandey, Economic Affairs Secretary Tarun Bajaj, and Expenditure Secretary T V Somanathan. After discussions in this meeting, the political leadership may take a call on whether to revise the budgeted revenue targets and come up with fresh estimates. 

 

For 2020-21, the Centre’s gross tax revenue (before devolution to the states) has been budgeted at Rs 24.23 trillion, a 12 per cent rise over the Revised Estimates for 2019-20 (FY20). However, with lower than expected collection last year, the budgeted target for this year magnified to a 28 per cent rise.

The Budget Estimate for net tax revenue (after devolution to states) is Rs 16.36 trillion, for non-tax revenue Rs 3.85 trillion, and for the divestment programme Rs 2.1 trillion. The loss of economic activity due to the pandemic and the nationwide lockdown — now over but still being implemented by states in a targeted manner — has led to multiple agencies forecasting that India could be headed for its severest contraction in four decades.

Gross direct tax collection fell 23.4 per cent to Rs 1.4 trillion as of July 7, against Rs 1.83 trillion in the comparable period last year.

 

“The impact of Covid-19 on the economy is yet to play out, with lockdown being re-imposed in certain states. With tax collection being a function of economic growth, it appears that collection will be lower than last year. However, we do expect a pick-up in the second half,” said a government official.

The income tax department missed the downward revised target for direct tax collection for FY20 by Rs 1.17 trillion to stand at Rs 10.53 trillion, a 7.8 per cent fall over the previous year.

“The target should ideally undergo a sharp revision to below last year’s. But being optimistic, it should be cut to at least the same as last year,” the official said. The Centre’s direct tax to gross domestic product (GDP) ratio fell to its lowest in 14 years in FY20 to 5.1 per cent, while the indirect tax to GDP ratio was at a five-year low. This was despite the fact that only a week was under the lockdown in the year due to Covid-19.

The indirect tax target of Rs 10.95 trillion will also need to be revised, with collection from Customs, GST, and excise significantly weak so far. GST collection declined 41 per cent in the April-June quarter.

 

Slowing collection has prompted the government to look at rationalising rates by correcting the inverted duty structure. The government has prepared a list of 24 items, including mobile phones, footwear, fabrics, light-emitting diode light, medical equipment, utensils, agricultural machinery, pharma, and renewable components, which have an inverted duty structure, resulting in refunds of close to Rs 20,000 crore annually. However, so far the GST Council has given approval for only mobile phones on increasing the rate to 18 per cent, from 12 per cent. State finance ministers, in March and in a recent meeting a fortnight ago, rejected the proposal for correcting the inverted duty structure for textiles, footwear, and fertiliser, citing the adverse business environment.

Suggestions from states, with respect to augmenting revenues, included a two-slab structure of 10 per cent and 20 per cent, against a four-slab one now, special higher rates for sin and luxury goods, and rationalising exempted items, besides revising the composition rate upwards for manufacturers, from the current 1 per cent.

The compensation mechanism to states has come under strain due to inadequate collection. Against the compensation collection of Rs 95,000 crore in FY20, the Centre had disbursed Rs 1.15 trillion to states up to November, using the balance from previous years and Rs 36,400 crore has been disbursed for three months up to February, from the pending integrated GST dues from 2017-18. 

The Council is going to discuss market borrowing by states or the Centre compensating them.
 

On the non-tax front, the government is assessing the cash position of state-owned companies and will ask them to ramp up dividend payout and share buyback as much as possible. The Centre is also expecting the RBI to transfer a higher-than-budgeted surplus for the second year in a row. The thinking is that since the RBI has ramped up purchases of government bonds, the interest earned on them will be transferred to the exchequer as dividend.