InvestorQ : This year the government looks to fall short on its revenue targets. What will the government do and what are the implications?
Arti Chavan made post

This year the government looks to fall short on its revenue targets. What will the government do and what are the implications?

3 years ago

The last year also saw a major shortfall. For example, the government fell short by Rs.60,000 crore in its direct tax collection target. Direct tax collections were around Rs.11,40,000 crore against a target of Rs.12,00,000 crore. This is just the direct taxes. Incidentally, there has been pressure on individual taxes and corporate taxes. On the GST front, government has already delayed refunds but still the monthly flows are nearly 10% short of targets each month. They ended up with Rs.110,000 crore shortfall. Let me briefly tell you what it could mean. Even in this current year, there is likely to be a huge shortfall which will get steepened by the Rs.145,000 crore by way of tax benefits to corporates. Here are the implications.

The shortfall in direct tax mop-up coupled with lower Goods and Services Tax (GST) realisation will have implications for the fiscal deficit. You will recollect that the government had pegged fiscal deficit at 3.3% of GDP. The only way the government can keep the fiscal deficit in check is to compromise on the public spending. But even that can only help up to a point and it will also look at more innovative sources.

One way is the RBI dividends. This year, the RBI is already paying Rs.176,000 crore as dividends. Now government has asked for additional interim dividend of Rs.30,000 crore. This is inflationary as it leads to monetization of deficit.

Like in the previous year, there was a virtual freeze on payouts. For example, scores of corporate tax return approvals were stalled and refunds were held up. All these are likely to create a liquidity crunch in the current year and reduce compliance in the coming year. Exporters have been the worst suffers in the GST refund delays and that is also hitting their working capital.

The original revenue assumptions for GST were made based on a certain median rate of GST but that had gone awry with the Council cutting the rates on most items. The GST Council had reduced tax rates on a number of items across different phases and that has impacted GST collections. Also the system is still a mess.

There is another casualty in the form of core welfare expenses going for a toss. In the last few y ears, we have seen allocations to primary health and primary education being reduced. That has only exacerbated the situation with higher fiscal deficit.

Don’t forget that higher fiscal deficit has larger macro implications. For starters, global investors tend to be wary of investing in an economy that does not adhere to fiscal discipline. Secondly, global rating agencies view fiscal profligacy as an indicator of bad financial management leading to rating downgrades. High levels of fiscal deficit also make the rupee vulnerable and increase the yields on bonds making the cost of funds higher in the economy.