NEW DELHI,ANTO T JOSEPH : Arun Jaitley is caught in a classic Catch-22. At a time when higher public spending is vital to India’s economic growth even at the risk of a higher fiscal deficit, the government at its fag end of the five-year term is staring at the possibility of a massive drop in tax collections.
The GST Council’s latest decision to lower tax rate on 178 items, leaving just 50 items in the top 28% rate slab, has drilled a fresh hole in the exchequer. Bihar finance minister Sushil Modi has pegged the revenue loss arising out of the fresh tax cuts at an annual Rs 20,000 crore. Given the extremely volatile political climate ahead of state elections, some more tax cuts can’t be ruled out. Congress vice-president Rahul Gandhi has promised to cap “Gabbar Singh Tax” at 18% in 2019, if elected to power, without counting the potential damage it would bring in its wake on the government kitty. After all, promises and freebies during elections are a new normal these days, and the party, which promised huge farm loan waivers and Rs 10-15 lakh into each Indian’s account from the massive black money haul, may feel helpless at Gandhi scion’s generosity.
A recent Reuters report pegged the estimated revenue shortfall at Rs 80,000 crore ($12.5 billion) if the current trend of chaos continued unabated until the fiscal-end. Tax collection is still in disarray as thousands of firms failed to comply with the work-in-progress GST system. West Bengal finance minister Amit Mitra claimed that in the first three months (July-September) of GST rollout, there is already a revenue loss of Rs 60,000 crore to New Delhi and Rs 30,000 crore to the state governments.
After reviewing the tax collection trends under GST for the first three months, Jailtey said it is too early to draw a clear picture, claiming that a lot of Integrated GST (estimated at Rs 90,000 crore) is blocked in transitional credit. It is as hazy as Delhi mornings these days.
In the first six months, tax revenues stood at Rs 5,42,358 crore, a healthy 44.2% of the Budget Estimate. On the other hand, non-tax revenue that consists of interest receipts and dividends and profits has fallen short at Rs 80,849 crore, around 28% of the full-year target. For 2017-18, the government has budgeted Rs 9.68 lakh crore from customs and GST.
Then comes the government’s other responsibility – the mammoth bailout of the NPA-hit public sector banks through recapitalisation. Though the modalities have yet to be made public, the total exercise is estimated at Rs 2.11 lakh crore over the next two years. The government is paying a huge price for the crony capitalism practised by the previous government and the mismanagement of some PSU banks. The government will directly pay banks Rs 18,000 crore by buying their shares and will then encourage banks to raise Rs 58,000 crore from the market. The bulk of the amount (Rs 1.35 lakh crore) will come from recapitalisation bonds. The bonds may not spike up the fiscal deficit, but the interest paid out on the bonds will surely be a drag.
The crude oil prices have risen to above $60 per barrel and it’s not good news either. The excise duty cut on petrol/diesel in October has led to a revenue loss of Rs 13,000 crore already.
The first casualty of the trimmed exchequer is the road and railway investments, followed by other public spending. That threatens to push the economic growth further down.
NOTE: The writer ANTO T JOSEPH is editor, DNA Money. He tweets @AntoJoseph