The Centre's gross tax revenue collection is facing a shortfall of over Rs 2 lakh crore and the government seems to have communicated to the Finance Commission, an autonomous body that defines the terms and oversees the distribution of tax proceeds between the states and the centre.
The government had budgeted for a gross tax collection of Rs 24.6 lakh crore for the current financial year against the revised estimate of Rs 22.5 lakh crore for 2018-19, an estimated 9.5 per cent growth in 2019-20. However, the provisional collection in 2018-19 was around Rs 21 lakh crore. It means the tax collection this year have to grow at 18 per cent, a difficult task given the slowing economy and poor GST collections.
The tax collection figure for the first five months of the current financial year does not give much hope either. The gross tax collection has been just about 27 per cent of the budgeted target of Rs 24.6 lakh crore until August this year. Last year, the government had achieved 28 per cent of the target during the same period. The gross tax collection in the first five months of the current financial year has been Rs 6.60 lakh crore compared to Rs 6.34 lakh crore in 2018-19, a growth of just 4.2 per cent against the required rate of 18 per cent. If tax collection continues to grow at the slower pace, the gross tax revenue will fall short by around Rs 2.5 lakh crore.
What makes the matter worse for the government is the fact that it had to take a dent of another Rs 1.45 lakh crore due to its recent announcement to cut corporate tax rate drastically from 30 per cent to 22 per cent. Even though some experts feel the likely impact (the revenue foregone of Rs 1.45 lakh crore) of the tax cut is overstated, it could yet be anywhere between Rs 1-1.25 lakh crore.
Around 2.45 lakh companies, which accounted for 69 per cent of the corporate tax, paid taxes at an effective rate of higher than 25 per cent in 2017-18. Companies that opt for 22 per cent basic corporate tax rates will have to pay an effective tax rate of 25.17 per cent after including the surcharge and cess.
GST monthly collections have not been enough either. With August GST collections at Rs 92,000 crore against the required run rate of close to Rs 1.1 lakh crore, the Centre's GST target for the current financial year also look far-fetched. Against the budget estimate of Rs 6.63 lakh crore, the Centre had collected Rs 2.40 lakh crore, or just 36 per cent of the full-year target.
People have been talking about an imminent shortfall in tax collection due to a slowing economy leading to lower than expected tax collections. The only point of contention is the quantum of the shortfall. While figures doing the round were between Rs 1.5 lakh crore and Rs 2 lakh crore, it now seems that the shortfall in gross tax collection could well be over Rs 2 lakh crore and the net tax collection (after paying the states' share) itself could fall short by Rs 1.5-1.8 lakh crore.
According to a Kotak Economic Research report, after accounting for a reduction in corporate tax rates, weak GST and income tax collections in 2019-20, the net tax shortfall is likely to be around Rs 1.7 lakh crore.