Budget 2023: How technology may help achieve the impossible trinity

Experts have requested FM Sitharaman for a cut in income tax rates, increase in expenditure, and fiscal consolidation

Late Finance Minister Arun Jaitley had once said that he received requests for a cut in income tax rates, an increase in expenditure and fiscal consolidation for one of the Budgets that he was to present. He wondered how these three measures could be taken together.

The broad theme of the requests did not change much over time. Experts also requested incumbent Finance Minister Nirmala Sitharaman to do so for the Budget for 2023-24.

How can this impossible trinity in the context of Budget making be achieved?

The Centre's fiscal deficit is already projected to touch 6.4 per cent of the gross domestic product (GDP) in the current financial year. There are chances of a slight slippage from the projection after the government went for Rs 3.26 trillion of the supplementary last week. Though the gross outgo would be Rs 4.36 trillion, Rs 1.10 trillion would come from savings in other schemes, programmes and ministries or departments.  

Regardless, the government may not be able to better its projection this time.

Besides, it had projected the deficit to come to 4.5 per cent of GDP by 2024-25. Unless this target is diluted, the government will have to either go for higher tax collections or forego capex-led growth that it has embarked on.

The Centre's capital expenditure is pegged to rise by 24.4 per cent to touch Rs 7.50 trillion this financial year. If grants for asset generation are also factored in, the effective capital expenditure is projected to rise by 27.4 per cent to Rs 10.7 trillion.

The government is not likely to give up this policy in the Budget for 2023-24 as the economy is likely to face external pressures, particularly from geo-political tensions and recession in Europe and slowing down of the US economy.

Meanwhile, pressure on various kinds of subsidies may keep revenue expenditure up if the government continues to give free foodgrains to 800 million people. Fertiliser prices may meanwhile come down if recession hits the world.

In the supplementary cited above, Rs 1.90 trillion or 43.5 per cent of the gross outgo was accounted for by food and fertiliser subsidies.

Given the two heads -- the pressure to lower fiscal deficit and high expenditure -- the only way left is to touch the tax rates, which have delivered handsome collections so far this year.

For instance, direct taxes rose to Rs 8.71 trillion till November 10. This constituted 61.31 per cent of the Budget target for the entire financial year. Most of the money under direct taxes comes in March, the last month of filing returns.

Besides, GST collections remained over Rs 1.40 trillion each month till November in the current financial year. However, excise and customs duty collections were muted due to cuts in taxes on petroleum and tweaking of import duties on various products due to geo-political tensions disrupting supplies.

Overall tax revenues are expected to be robust in the current financial year. The Budget projected just 1.8 per cent growth in tax collections at Rs 27.6 trillion in FY23 over the actual collections of Rs 27.1 trillion in FY22.

However, collections grew 18.4 per cent year-on-year (YoY) at Rs 16.1 trillion in the first seven months of the current financial year.

For fiscal deficit, the Centre's net collections (after devolution to the states) are important. Even these grew 11.20 per cent at Rs 11.7 trillion in this period. These collections constituted 60.5 per cent of the projections made in the budget. This was higher at 68.1 per cent in the corresponding period a year ago due to subdued excise and customs collections this time around.

These tax collections are needed to keep the fiscal deficit under control, given the high expected expenditure at least on the capex front.

It is here that technology becomes a key.

Experts said that hitherto impossible tasks of low tax rates, high expenditure and fiscal prudence could now be maintained by taking help of technology to boost collections.

They say that personal income tax rates cannot be lowered unless there is a way to increase its base. And base could be expanded by more compliance from the assessees. That way, rates could be lowered, expenditure be raised and fiscal deficit be reined.

For instance, Rohinton Sidhwa, partner at Deloitte India, said corporates and personal income tax rates have steadily declined around the world. "India has no option but to follow the same trends. Gains in technology and better reporting have proven that they can deliver higher collections. An example is the AIS reporting that has been rolled out recently," he said.

Similarly, GST compliance got a boost after e-way bill was introduced way back in 2018 and also e-invoicing system for B2B transactions was implemented and later extended to those with an annual aggregate turnover of more than Rs 10 crore from October this year onwards.

One of the ways out being adopted by the government is to use GST data to identify income tax evaders. This kind of data mining is also expected to boost direct tax collections.