Note ban puzzle in tax collections

A look at the Budget’s indirect tax numbers suggests that the finance minister has factored in an economic slowdown in the fourth quarter of the current financial year due to demonetisation.

Yet, on the direct tax side, for corporate and personal income tax, the Budget Estimates are identical to the Revised Estimates. This suggests that the government may not have accounted for a possible windfall in direct tax collections from the income disclosure schemes launched after demonetisation.

According to the Budget documents, Union excise duty collections are pegged to grow at 34.5 per cent in FY17, putting total collections at Rs3.88 lakh crore for the full year. But data from the controller general of accounts (CGA) show that by the end of December, excise collections stood at Rs2.46 lakh crore. This suggests that Jaitley had estimated collection of Rs1.41 lakh crore in the last quarter of FY17.

This would imply that on a year-on-year basis, excise collection growth in the last quarter would slow down to 21.9 per cent against 32.74 per cent in 2015-16 over 2014-15.

A more deteriorating trend is seen in service tax collections. The collection for 2016-17 is pegged to grow at 17.1 per cent to Rs2.48 lakh crore. But CGA data show that till December, the government had collected Rs1.64 lakh crore as service tax. This suggests that in the last quarter, Jaitley expects Rs83,854 crore to come in. This implies that in the last quarter, service tax collections are expected to grow by a mere 4.1 per cent over the corresponding year-ago period.

This is a substantial slowdown from the growth witnessed in the last quarter of 2015-16, when the collections grew 28.1 per cent over 2014-15. It also suggests that the government expects the services sector to take a bigger hit.

On the direct tax side, the Revised Estimates for both corporate and income tax are identical to the Budget Estimates made at the beginning of the year. This despite the fact that the last quarter numbers are only projections.

This is surprising, considering that the government had claimed the demonetisation would ensure a bump up in revenues as advance tax collections rise. After demonetisation it had also launched a second income disclosure scheme which would get accounted for this year’s revenues. But, any tax the government might hope to make on the deposits arising post-demonetisation would reflect in the next fiscal’s numbers.  It is possible that any bump on account of income disclosure schemes could be offset by the reduced taxes owing to economic slowdown.