Poor corporate tax collection and reading the tea leaves

Indian elephant is panting as the first quarter of financial year 2016 comes to an end. Various data points emanating from the government shows there are no signs of growth picking up yet. 

The latest in the series of recent data is the corporate tax numbers. A Business Standard report says corporate tax growth has been only 2% in the first quarter of the current fiscal. Though direct tax collection has been at Rs 1.2 lakh crore, a growth of 22% was mainly on account of a sharp jump in personal income tax collection. 

Of the total direct tax collection, Rs 64,000 crore came from personal income tax, representing a growth of 48%. The high personal income tax growth was on account of the new rules which require non-corporates to pay 15% advance tax by June 18, against 30% by September 15.

Though the government would have more or less met its tax collection numbers, the composition of tax collected does not augur well for the future. 

Other data points have also pointed to a slowing demand outlook. RBI governor Raghuram Rajan in his recent policy statement mentioned the tepid demand outlook. So does the recent Financial Stability Report, which points out that non-performing assets (NPA) of banks are unlikely to come down anytime soon on account of subdued performance in the corporate sector. 

During April 2016, index of industrial production contracted 0.8% mainly on account of a poor performance in the manufacturing sector, which fell by 3.1%. 

Among other key indicators that suggest a slowing economy is the non-food credit growth which has fallen to 9.14%, very close to its decade low level. Again in this data point, the respectable number is mainly on account of growth in retail loans as project loan growth has not shown any growth at all. Export numbers continue to disappoint for the 18th month in a row. A pick-up in private sector investment is still not visible, while their share in stalled projects continues to increase. 

These bearish news flows are expected to impact government spending going forward. Finance minister has made his stance clear that he would like to maintain fiscal discipline, in which case a slowing tax collection will impact his ability to increase spending. To make matters complicated, government has cleared the 7th Pay Commission. Though the move is expected to push up demand, it will hit government financials. Given the limited leg room, government will have to resort to increased borrowing. The only silver lining is the likely possibility of a normal monsoon which should trigger rural demand. 

For corporate India, the tax numbers not only suggest a slowing demand but also falling profitability. The tailwind of low commodity prices is behind it. Most commodity prices are trading at higher levels as compared to the previous quarter. 

What the tax numbers also indicate is the chance of a poor performance in the first quarter of current fiscal.