What Jaitley is doing to meet the Rs 1,05,000 crore tax collection gap - The Daily Reckoning
The Daily Reckoning by Vivek Kaul
On This Day - 6 February 2015
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What Jaitley is doing to meet the Rs 1,05,000 crore tax collection gap A  A  A

- By Vivek Kaul

Vivek Kaul
In the Mid Year Economic Analysis released in December 2014 it was estimated that the government will run short of the projected tax revenues by Rs 1,05,084 crore. As I have suggested in the past, this means that the government will have to slash its expenditure big time, in order to meet the fiscal deficit target of 4.1% of the GDP that it had set for itself when it presented the budget in July 2014.

A deeper reading of a newsreport in The Economic Times suggests that this will now partly happen on its own. The government expenditure is essentially categorized into two categories-plan and non-plan. Plan expenditure is essentially money that goes towards creation of productive assets through schemes and programmes sponsored by the central government.

Non-plan expenditure on the other hand is an outcome of planned expenditure. For example, the government constructs a highway using money categorised as a plan expenditure. But the money that goes towards the maintenance of that highway is non-plan expenditure. Interest payments on debt, pensions, salaries, subsidies and maintenance expenditure are all non-plan expenditure.

Data released by the Controller General of Accounts(CGA) suggests that during the first nine months of the financial year the period between April and December 2014, the government spent Rs 3,52,631 crore or 61.3% of the Rs 5,75,000 crore plan expenditure that the government had budgeted for.

A government rule does not allow it to spend more than 33% of the plan expenditure in one quarter. At the same time the government cannot spend more than 15% of the plan expenditure in March.

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Given this, how do the numbers stack up? 33% of Rs 5,75,000 crore, the budgeted plan expenditure for the year, amounts to Rs 1,89,750 crore. The government has already spent Rs 3,52,631 crore between April and December 2014. Hence, for the current financial year as a whole, it cannot spend more than Rs 5,42,381 crore (Rs 3,52,631 crore plus Rs 1,89,750 crore).

This means that the government will automatically end up not spending Rs 32,619 crore. In fact, the 33%/15% rule applies at the ministry, department as well as scheme level. Given this, the actual number can be slightly different from the overall number arrived at.

What this means is that the government will have to further slash plan expenditure in order to meet the tax gap of Rs 1,05,084 crore. This shouldn't come as a surprise given that in the last two financial years, this is exactly what the government did.

The plan expenditure target of the government during the last financial year was at Rs 5,55,322 crore. The actual plan expenditure came in at Rs 4,75,532 crore, which was close to Rs 80,000 crore or 14.4% lower. This is how the fiscal deficit of 4.6% of GDP was achieved.

A similar strategy was followed in 2012-2013 as well. In 2012-2013, Rs 5,21,025 crore was budgeted towards plan expenditure. The final expenditure came in 20.6% lower at Rs 4,13,625 crore.

The Economic Times suggests that the plan expenditure this time around will be Rs 80,000 crore lower. The paper goes on to suggest that this will be Santa's late gift to finance minister Arun Jaitley.

This can hardly be the case given that plan expenditure is asset creating. In an environment where private investment continues to remain slow, if the government expenditure is also cut dramatically, it can't be good for the economy. But given that the government's revenue projections have gone dramatically wrong there is nothing much it can do other than slashing plan expenditure, given that non plan expenditure cannot be easily slashed.

The bigger problem here remains that India's tax collections are very low in comparison to its gross domestic product. Analysts Ritika Mankar Mukherjee and Sumit Shekhar of Ambit Capital in a recent report titled Modi's ambitions will reshape India's fiscal construct show that India's tax collections are abysmally low as a proportion of its GDP. The next exhibit shows that clearly.

Exhibit 1:India's tax-to-GDP ratio remains
abysmally low at 11% as per FY15 Budget Estimates
Source: CEIC, Ambit Capital research, Note: Data is presented on financial year basis

At the same time, as the next exhibit shows, the tax to GDP ratio of India is lower than that of other emerging markets
Exhibit 2: India's tax GDP ratio is lower
than that of most emerging market peers
Source: World Bank, Ambit Capital research, Note: Data is presented on calendar year basis

Given this, it is very important that the government figure out ways of improving its tax collections. This is especially important in light of the fact that the government seems to have huge plans for spending money on improving India's pathetic public infrastructure.

As the Ambit Capital analysts point out: "India's tax-to-GDP ratio has been range bound between 8% and 12% over the past two decades. Furthermore, a comparison with peers as well as with developed countries like the UK points to the vast tax revenue-generating potential in India which suffers from large-scale tax evasion."

The Ambit analysts also feel that boosting India's tax-to-GDP ratio will be one of the major things that the Narendra Modi government will do over its term. As they point out: "Our discussions with well-placed policy experts suggest that enhancing India's abysmally low tax-to-GDP ratio is likely to be one of the primary objectives that Modi will pursue over his five-year term."

One way of improving the tax-to-GDP ratio is to go about reducing the total amount of black money in the Indian financial system in a systematic way. While the government has made a lot of noise about bringing about all the black money that has left the Indian shores, it hasn't had much to say about the black money floating around in India, which would be significantly easier to recover. Going after the black money in India would be the quickest way to significantly improve the country's abysmally low tax-to-GDP ratio.

The other major area that needs to be looked at are the tax rates and exemptions that come with them. As Swaminathan Aiyar pointed out in a recent column in The Times of India: "Currently , India has among the highest tax rates in Asia, but also hordes of exceptions."

Along with the budget every year, the government releases the revenue foregone number. This number for the last financial year 2013-2014 was estimated to be at Rs 5,72,923.3 crore. "The estimates and projections are intended to indicate the potential revenue gain that would be realised by removing exemptions, deductions, weighted deductions and similar measures," the statement of revenue foregone points out.

In the table that follows it can be clearly seen that the Indian corporates benefit the most out of all the exemptions and deductions available under the various tax laws in this country. The businesses benefit the most with corporate income tax, excise duty and customs duty foregone, forming a bulk of the revenue foregone by the government.

Tax Year (in Rs crore)
  2012-2013 2013-2014
Corporate Income Tax 68,720.0 76,116.3
Personal Income Tax 33,535.7 40,414.0
Excise Duty 2,09,940.0 1,95,679.0
Customs Duty 2,54,039.0 2,60,714.0
  566234.7 572923.3
Source: Annual budget

The revenue foregone number is based on certain assumptions. As the statement points out " The estimates are based on a short-term impact analysis. They are developed assuming that the underlying tax base would not be affected by removal of such measures....The cost of each tax concession is determined separately, assuming that all other tax provisions remain unchanged. Many of the tax concessions do, however, interact with each other. Therefore, the interactive impact of tax incentives could turn out to be different from the revenue foregone calculated by adding up the estimates and projections for each provision."

Nevertheless, it is too big an amount to be ignored. In fact, the number is bigger than the projected fiscal deficit of Rs 5,31,177 crore for this financial year. Given this, the government needs to go through these exemptions carefully and figure out whether they are really needed.

Of course, this exercise may not be possible to carry out before the budget, but it needs to be taken up seriously. Lower tax rates along with fewer deductions and exemptions should go a long way in improving India's tax-to-GDP ratio.

What are the deductions and exemptions you think the government should remove? Post your comments or share your views in the Equitymaster Club.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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5 Responses to "What Jaitley is doing to meet the Rs 1,05,000 crore tax collection gap"

yogendra pal singh

Feb 7, 2015

Focus on removing Tax exemption of 1% people who are holding/using 99% of wealth. Tax regime must be simplified .
In fact Agro income more than 5lacs must be taxed.
POLITICIAN,REAL ESTATE, CONTRACTORS, corporate people are circumventing tax payments and creating black money.

Like 

vipul jasani

Feb 6, 2015

Hello,

First of all Govt. Should remove all tax benefits on housing loans except self occupied homes. This will increase tax revenue significantly.

secondly, increase stamp duty by 100% on each property transactions.

thirdly impose higher additional tax on unsold / unused property.

fourth bring tax reforms and simplyfy tax structure in such as way that every one is happy to pay tax - both direct and indirect.

Govt. Itself is responsible for black money due to tax terrorism prevailing in India.

pl treat all citizens respectfully and remove tax terrorism and govt will have surplus money.

thanks

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Shamal

Feb 6, 2015

We need to have break down of the total planned expenditure to know whether really govt has spent that money on a lucrative projects or developments. Infant, there should be an independent committee (Public reps) to oversee the expenditures. There should be an independent auditors (not Govt auditors) who should report to this committee. As most of us know that maximum pilferage happens from planned and non-planned expenditures of the Govt. Speaking about the black money, it is a cancer of our economy. Why this is happening? Rich people don't trust govt in paying legitimate taxes. Tax rules have to be simplified.

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SATYABRATA MAITI

Feb 6, 2015

You are absolutely right. There is enough black money within the country. I just wonder, when public knows who are tax evaders, how come govt does not know. Majority of lawyer, nurshing homes, doctors, teachers running tution classes are not paying tax on their income. I remember in late 90s I used to go to a lawyer for a case, who used to travel by Maruti 1000 and used pay 1000 income tax and I used go in scooter and used to about 40000 IT. Govt. Should put these tax evafers behind the bar or seized disproportionate assets and distribute among have not's. Indirect means of building assets also can be stopped, if one house one can have at a time, etc.

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SundaraVaradan

Feb 6, 2015

What Tax Exemption to be removed?

Agri-income Tax, where the Agri-Income is more than Rs. 1 CRORE per Annum.

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