How have been the tax collections during the fiscal year 2020-21? Have they been badly hit by the COVID pandemic?

The indications have been there from Day-1 that tax collections of the government are being badly hit by the pandemic. Now the numbers show that the hit is real and that the government is really struggling to make its ends meet.

If you look at the data for the first five months from April 2020 to August 2020, then during this period, the net direct tax collections of the Indian government fell by 31% to Rs.192,000 crore compared to the corresponding period in the previous fiscal year.

There are clearly not prizes for guessing but the sharp fall in direct taxes was largely due to virtual stagnation of economic activity in the months of April and May, which took its toll on the collection numbers. The lag effect was felt in subsequent months too.

The impact of the pandemic and the lockdown was not just restricted to direct taxes but extended to the indirect tax collections too. The net indirect tax collections for the first five months of the fiscal were 11.2% lower at Rs.342,591 crore; i.e. GST plus customs & others.

If you just look at pure GST collections for this period, it stands at Rs.181,000 crore for the April to August months. This is against the budget target of Rs.690,500 crore for the full year, which now is becoming to look increasingly theoretical.

From a financing perspective, this means India may end up with a huge fiscal deficit of closer to 7.5% as compared to the original budget target of 3.5%. Most likely, this shortfall in tax collections for the year will have to be compensated by RBI deficit financing.