With Tax Revenues Set To Exceed Its Own Estimates, Government Has Room To Simplify Personal Tax Slabs

In the recent Union Budget, Finance Minister Nirmala Sitharaman announced a revision of gross tax revenues (GTR) to Rs 25.16 lakh crore as against a budgeted estimate of Rs 22.17 lakh crore.

Indeed, a previous Swarajya article titled “Unprecedented tax revenue augurs well for India” had conservatively estimated financial year (FY) 2021-2022 tax revenues could increase to Rs 25.1 lakh crore with the possibility of increasing further to Rs 26.2 lakh crore.

The table below shows the revised estimate (RE) in GTR and large tax headings in FY 22, actual collections till January 2022, collections in February and March of 2021 (taken conservatively) which is added to the actuals till January 2022 to produce estimated collections in FY 22.

The Rs 25.16 lakh crore in GTR (RE) has grown mainly from corporation tax (CT), income tax (I-T) and goods and services tax (GST). The government also released the actual tax collections till January 2022; the total of which is Rs 20.98 lakh crore.

On taking the actual tax collections of February and March 2021, which is a GTR of Rs 5.27 lakh crore, and adding it to the actuals till January 2022, a conservative estimate of FY 22’s total adds up to Rs 26.25 lakh crore — nearly Rs 1 lakh crore over the RE of Rs 25.16 lakh crore.

The significant differences stem from CT increasing from Rs 6.35 lakh crore to Rs 6.69 lakh crore in our estimate, and in GST from Rs 6.75 lakh crore to Rs 7.08 lakh crore.

It is interesting that once again the government has estimated the tax figures very conservatively. Looking ahead at the estimated tax collection in FY 22-23, GTR is estimated at Rs 27.57 lakh crore BE, essentially because of a decline in Union excise duties on fuel in December 2021. If FY 22’s GTR indeed ends at the estimated Rs 26.25 lakh crore, then FY 23 BE only exceeds this by Rs 1.32 lakh crore — a 5 per cent increase.

Taking the actual increase of 9.6 per cent of tax collections in BE of FY 22-23 (Rs 27.57 lakh crore) over RE of FY 22 (Rs 25.16 lakh crore), one can estimate that FY 23 tax collections may exceed the budgeted amount by Rs 1-1.5 lakh crore.

The economy is expected to grow by about 17.4 per cent in FY 23; recent estimates have reduced this outlook slightly. The impact of the Russian-Ukraine war is yet to be analysed on fiscal resources. Until February 2022, growth seems normal as exports and imports have both increased, and the E-Way Bills for transportation has also shown an increase. There’s thus reasonable optimism that the actual tax collection for FY 22 could be higher than the RE.

The actual accounts for dividends and profits until January 2022 is Rs 1.41 lakh crore as against the RE of Rs 1.47 lakh crore — 96 per cent of the RE was already collected by January 2022. Based on interim dividends announced by many PSUs (public sector undertakings), we can expect an increase of Rs 20,000 crore by 31 March 2022 adding up to Rs 1.61 lakh crore.

The key shortfall will be in the area of divestment where the target was reduced to Rs 78,000 crore against the actual collections of Rs 12,036 crore until January 2022. If no divestment happens, there could be a shortfall of about Rs 65,000 crore. A part of this could be made up by the increase of Rs 20,000 crore in dividend with the balance by a decline in expenditure.

Total expenditure is estimated at Rs 37.70 lakh crore in RE FY 22, with actual incurred by January 2022 at Rs 28.09 lakh crore. There is an additional capital expenditure (capex) of Rs 1.60 lakh crore budgeted to be spent as per the RE, and Rs 2 lakh crore on interest payments. Based on the actual payments until January 2022 and the RE, Rs 9.61 lakh crore needs to be spent.

The fiscal deficit is budgeted at Rs 15.91 lakh crore where the actual FD till January is Rs 9.37 lakh crore. If the target remains the same, then the difference of Rs 6.54 lakh crore must be borrowed in February and March of 2022. A significant part of the Rs 6.54 lakh crore will come from small savings which has been budgeted at Rs 5.91 lakh crore in FY 22.

Overall if one looks at the tax collections, there is great degree of optimism and data which provides the hope that tax collections will exceed the RE by Rs 1-1.5 lakh crore with positive impact.

Of course, the uncertainty created by the Russia-Ukraine war can hurt corporate profits and increase oil prices which could impact multiple industries that depend on petrochemicals for their raw material input with the inability to pass on extra costs to the end consumer.

The CT collected in February-March was Rs 2.09 lakh crore in FY 19 (31.5 per cent of year’s total), Rs 1.64 lakh crore in FY 20 (29.4 per cent of year’s total), and Rs 1.22 lakh crore in FY 21 (26.8 per cent of year’s total). If one takes the total CT estimated as above for FY 22 of Rs 6.69 lakh crore, then the increase of Rs 1.22 lakh crore is only 18.2 per cent of the year’s total.

Given that CT collection in December 2021 of Rs 1.67 lakh crore was much higher than that of Rs 1.27 lakh crore in December 2020, and in September as well when the advance taxes come in, it is conceivable that CT in March will be higher than our estimate this year.

Overall, the budget has been conservative this year. The extra revenues accrued after paying the 42 per cent share to states may be used to subsidise the increase in fuel prices borne by oil companies that they were unable to pass on to end consumers. Recent reports indicate that till 4 March 2022, a total of Rs 12/litre has to be passed on to neutralise the impact. Oil prices are expected to climb further, and the government does indeed have the cushion in the current tax collections to help neutralise the impact.

The increased tax collection could also give the government the room to radically alter and simplify the personal tax slabs. The current 7-slab system without deductions is complicated. A 3-slab system with no deductions is suggested to help the middle class which has been hurt during the Covid-19 pandemic and with inflation. It is the hope that when the government goes back to Parliament to get the budget approved, they will change the tax slabs and usher in much-awaited tax reform.