Non Tax Revenue that contributes around 20% of total central government revenues is likely to miss targets in this fiscal year. The government is well short of its disinvestment target as of February 2016 and dividends from its entities too are likely to fall short given that many of its entities are showing lower profits and even losses due to economic slowdown and fall in commodity prices
On the tax revenue front, the government is confident of meeting its targets largely due to the sharp growth of 33% in indirect taxes in the first ten months of the fiscal year against budgeted growth of 19%. Direct tax collections are likely to fall short of targets given weakness in the corporate sector.
The much awaited indirect tax reforms, GST (Goods and Services Tax), which was supposed to be implemented in April 2016 will not see the light as on the scheduled date. Read our note of GST. The government is yet to get the consent of the parliament for GST implementation but is hoping that it can be implemented later during the fiscal year.
Centre’s Tax to GDP ratio has been hovering in an 8% to 11% range over the last fifteen years. The government being unable to broaden the tax base has had to resort to deficit financing for its budget shortfall.
Tax and Non Tax Revenues
Tax Revenues account for 81% of total central government revenues. Direct taxes that comprise of Corporate Tax and Income Tax account for 55% of total tax revenues while indirect taxes that include Excise Duties, Customs Duties and Service Tax account for 45% of total tax revenues. The government shares 42% of total tax revenues with the states after adopting the recommendation of the 14th Finance Commission.
Non Tax Revenues that include dividends received by the government, disinvestment of stakes in PSU’s, spectrum auctions and license fees and interest income account for 20% of total tax and non tax revenues of the central government. The government sells its stake in its entities to add to its capital receipts, which forms the disinvestment revenue.
Government receives dividends from PSU’s and the RBI, which forms 56% of total non tax revenues. RBI is the largest dividend payer to the government and has paid Rs 659 billion to the government in fiscal 2015-16, accounting for 53% of total budgeted revenues from dividends.
Government could fall short of its total dividend target of Rs 1242 billion given that many banks are showing losses due to high provisions for bad loans while profit making and dividend paying companies such as BHEL are showing losses due to weakness in the power sector.
On the disinvestment front, the government has managed to raise just Rs 133 billion from its total target of Rs 695 billion, a shortfall of 81%.
Telecom spectrum auctions have not been held in fiscal 2015-16 and the government will see a shortfall from its target of Rs 428 billion from spectrum auctions and telecom license fees.
Government receives interest from states and the railways that forms most of its interest income.
Table 1 gives the tax and non tax revenues of the central government.
On the direct tax front, corporate taxes forms 59% of total direct tax collections while income tax forms 41% of total direct tax collections. Wealth tax was abolished in fiscal 2015-16. Corporate profitability drives corporate tax collections and if profits do not grow fast in a slowing economy, corporate tax collection growth will be hit. Raising corporate taxes is not an option, as it will lead to lower incentive for businesses to invest, especially if the economy is opened up for competition.
Income tax growth largely depends on increasing the base of individuals paying tax. Income tax includes securities transaction tax but that accounts for just 2% of total income tax collection. The more jobs created in the economy the better the income tax collections.
Direct tax collection has decreased over the last two years and indications are that it will miss targets this year given weakness in the corporate sector.
Indirect taxes include customs duties, excise duties and service tax. Service tax accounts for 32% of total indirect tax collections and is the focus area of the government. Customs and excise duties form 32% and 35% respectively of total indirect tax revenues. The GST (Goods and Sales Tax) that was expected to be introduced in April 2016 would have reformed indirect tax structure in India and replaced excise duties and service tax and also would have shown higher indirect tax collections in the fiscal year 2016-17.
Excise duty collections have risen by 67% in the first ten months of fiscal 2015-16, largely due to higher excise duties imposed on fuel. Customs duties and service tax collections have risen by 15% and 25% respectively and total indirect tax collections have risen by 33%. Indirect tax collections will be higher than budgeted growth estimates of 19%.