Revenue situation rules out further tax sops for the individual taxpayer

Even tax cuts in 2020-21 could be a difficult proposition as officials dismiss reports of relief for salaried class and scrapping of DDT and LTCG

Ever since Finance Minister Nirmala Sitharaman announced corporate tax cuts in September in a bid to boost the economy, expectations have increased that there could be further sops on the taxation side either over the coming few months, or in the upcoming 2020-21 Union Budget.

There has been some talk of income tax relief for the salaried classes, as well as the scrapping of dividend distribution tax and long-term capital gains tax. Officials have been quick to dismiss these reports and have said that any decision on further tax sops will be taken in pre-budget discussions.

A senior official told Business Standard that any tax relief for salaried classes is out of the question for now given the centre’s dire fiscal situation. For next year as well, while year-on-year tax revenue growth may be higher due to a low base effect, budget makers will have to look at projections carefully before it is decided that whether Finance Minister Nirmala Sitharaman announces various tax measures in the budget or not.

“The slowdown is expected to persist in the short run. Even next year, while growth is expected to pick up due to a slow base effect, we don’t expect the revenue situation to be so healthy that there can be major income tax cuts, or cuts in other taxes,” said an official.

“We will have to look at the numbers very carefully before taking a decision,” the person added.

Consider the revenue situation. In 2018-19, gross domestic came in at a five-year low of 6.8 per cent and the gross tax revenue shortfall was Rs 1.9 trillion last fiscal year.

The situation isn’t expected to improve this year. While the 2019-20 budget assumes a 12 per cent nominal gross domestic product growth over 2018-19, the April-June nominal GDP growth came in at 8 per cent, the lowest since the third quarter of 2002-03. Real GDP growth for the quarter was 5 per cent, the lowest since 2013.

The second quarter could be even worse. A severe contraction in factory output has prompted analysts to downsize their estimate of the pace with which it could have grown in the July-September quarter. So much, that most of them have put the headline number at 4.2-4.7 per cent.

The gross tax revenue shortfall this year could be higher than Rs 2 trillion, as per an internal assessment by Finance Ministry, compared to the budgeted estimate of Rs 24.6 trillion. As reported in Business Standard earlier, this assessment is learnt to have been shared with the Fifteenth Finance Commission (15th FC) as well.

Meanwhile, the income-tax department has asked for a cut of at least Rs 1 trillion in the target for direct tax collection this year because of growth in the segment sliding to 3 per cent as of October 31. The reduced growth is largely because of consumption slowdown and tax rate cuts.

Corporation tax collection, net of refunds, grew by just 0.5 per cent in the first seven months of the fiscal year, against the year’s expansion target of 15.4 per cent at Rs 7.66 trillion. Personal tax collection grew by 5 per cent till October, against the year’s target of 22.4 per cent at Rs 5.69 trillion. Direct tax collection touched Rs 5.2 trillion, which is only 39 per cent of the year’s target of Rs 13.25 trillion.

Direct tax growth in FY20 was estimated at 17.3 per cent. If the targets are not revised, collection will need to expand by around 30 per cent in the remaining five months of the fiscal year.

The Central Board of Direct Taxes is anticipating a shortfall of around Rs 50,000 crore on account of economic slowdown. The corporate tax rate was cut to 22 per cent from 30 per cent for the existing companies that do not get any exemptions, and to 15 per cent from 25 per cent for new manufacturing companies. With surcharge and cess, the effective tax rate for the existing companies has come down to 25.17 per cent, from 35 per cent. The minimum alternate tax rate was also reduced from 18.5 per cent to 15 per cent. 

Year	Budgeted (in trillions)	Actuals (in trillions)	Difference
FY2016	14.5	14.5	-
FY2017	16.3	17.2	0.9
FY2018	19.1	19.2	0.1
FY2019	22.7	20.8*	-1.9
FY2020	24.6
*Provisionals
Source: Budget and economic survey documents