Can govt squeeze in a tax stimulus to quell Covid-induced economic crisis?

Falling direct and indirect tax revenues give it little elbow room to do so, even as industry clamours for relief

Keynesian economics had prescribed an increase in  expenditures and cutting of taxes to pull the economies out of the great depression. Many economists offer the same formula to fight the economic slowdown exacerbated by the Covid-19-induced lockdown.

During the time of depression of the late 1920s and 1930s, British economist John Maynard Keynes argued that even small direct interventions by the Government to perk up demand can have a disproportionately high impact on economic growth due to the multiplier effect.

While the government has already announced a package of Rs 1.71 trillion targeted at vulnerable sections of the society, does India have space to cut taxes after the overhaul of corporation taxes and leeway to the middle class to opt for lower personal income tax rates? And this, at a time when the slowing down economy has put a question mark on the revenue numbers given in the Budget? 

The numbers speak

The latest Budget had reduced the revised estimates (RE) on gross tax revenue collections (before devolution to states) by 12 per cent to Rs 21.6 trillion from the budgeted Rs 24.6 trillion for 2019-20. And now, even the RE is difficult to meet. While all numbers have not come in, let's look at the direct tax numbers. The RE, which was already a truncated number compared to BE, pegged direct tax collections at Rs 11.70 trillion for FY20. However, actual collections stood at Rs 10.27 trillion during 2019-20, a record shortfall of Rs 1.43 trillion, or 8.7 per cent of the RE number.

This would further increase the growth number for revenues for FY21. For instance, direct tax collections were projected grow at a rate of 12.7 per cent over RE of 2019-20 to Rs 13.19 trillion for 2019-20. Now this growth will constitute 28.43 per cent over the actual direct tax collections for 2019-20.

This percentage of growth would have anyway looked challenging had the economy grown by 6-6.5 per cent in the current financial year, as per the Economic Survey for 2019-20. But now, when various agencies have predicted the growth to be quite low, with some even estimating a contraction, a 28.43 per cent growth rate in direct tax numbers looks like a pipe dream.

Reconciling the GST numbers given in the Budget with the actual numbers is bit tricky since the union Budget does not give state figures and undistributed IGST becomes an issue. However to get an idea, let us compare the actual numbers of December, January, February and March 2020 against what the finance ministry has targeted.

In December 2019, the revenue department had set the average monthly GST target for December 2019-February, 2020 at Rs 1.1 trillion, and Rs 1.25 trillion for March, 2020. However, GST collections for December came in at Rs 1.03 trillion. Then, the department again raised the target for January and February to Rs 1.15 trillion each and retained Rs 1.25 trillion for March. The figures for January came in at a healthy Rs 1.10 trillion, though a shade lower than the target. For February, it stood at Rs 1.05 trillion. March, which was to yield the highest collections, delivered just Rs 97,597 crore. March figures reflect the activities in February when there was no lockdown. What will happen to GST figures in 2020-21 is anybody's guess when economic activities having been washed out completely at least till April 20, and it is not clear whether the lockdown will be lifted from May three.

In fact, the government has also recognised it and will come out with new numbers sometime in July after the Covid-19 situation normalises.

What industry wants

All this puts a question mark over any tax stimulus that the government can offer, despite industry's call for one. According to a survey by Ficci and consultants Dhruva Advisors, as many as 44 per cent of companies wanted relief.

When asked as to how the government can offer tax relief in the current situation, Dinesh Kanabar, CEO of Dhruvs Advisors told Business Standard it actually depends on what the government wants.

"If they say that they don't want to aggravate fiscal deficit, then the matter ends," he said. “But, if they want to give stimulus to industry, they can reduce corporate tax rates to 15 per cent for all the manufacturing units against what they did only for those setting up plants on or after October 1, 2019,” he suggested.

In September 2019, the government had reduced  the corporation tax rate from 25 per cent to 15 per cent for companies getting incorporated on or after October 2019 onwards and starting production before March 31, 2023. With cess and surcharges, this comes 17.01 per cent against 29.12 per cent for the existing manufacturing units. The new units needn't pay minimum alternate tax (MAT) either.

Kanabar also said the government should defer GST payments for April, May and June.

Abhishek Rastogi, partner at Khaitan & Co., suggested the government should offer incentives to those who can pay their taxes for the whole of FY21 in advance. "That way, the government will also get revenue which it can utilise for the stimulus and taxpayers will get some relief too," he said.

Meanwhile, the Central Board of Direct Taxes (CBDT) and Central Board of Indirect Taxes and Customs (CBIC) have expedited the process of issuing refunds to taxpayers.

CBIC has cleared over Rs 10,700 crore of refunds in GST and customs duty between April 8-23. The Finance Ministry had, on April 8, said that in order to provide relief during Covid-19, it has been decided to issue all pending GST and custom refunds which would benefit around 100,000 business entities, including MSME. The total refund granted will be approximately Rs 18,000 crore, it had said.

Also, CBDT has issued over one million refunds totaling around Rs 4,250 crore as on April 14, 2020. About 175,000 more refunds are currently being processed, the Board said.

Why the 2008 economic crisis was different

Unlike the  fiscal stimulus in 2008-09, tax cuts across board seem difficult this time.

Prior to 2008, stimulus had beeb a bad word in policy circles for long. But it acquired acceptability after the global financial crisis forced major countries of the world, such as US, Japan, China and European nations to bring out large fiscal stimulus packages.

In India's context, the government not only gave an expenditure boost to the economy, but also cut excise duty by six percentage points in two phases and services tax by two percentage points.

In the first phase the fiscal stimulus package in 2008-09 included a blanket 4-percentage-point cut in the excise duty rates, Rs 20,000 crore in plan spending by the Government, Rs 10,000 crore funding for infrastructure finance, export subsidies and a large government order for new buses to replace state public transport fleets.

It came out with two more packages. In the first week of January 2009, it was felt that global recessionary conditions were still very strong which would adversely after growth of the Indian economy. As such the second fiscal stimulus package was announced on January 2,2009. Unlike the first one, the second fiscal stimulus package was directed at improving or facilitating supply of finance to some organizations.

In this third package announced on January 24, 2009 the government sought to boost demand by cutting central excise duty by two percentage points, service tax by two percentage points and lower customs duty. This was estimated to cost the exchequer Rs. 29,100 crore.

The packages did revive GDP growth. From 6.7 per cent in 2008-09, the growth shot up to 8.6 per cent in FY'10 and to 8.9 per cent in FY11. However, it had a cost the fiscal deficit for FY'09 rose to six per cent of GDP, from the projected 2.5 per cent. 

Tax stimulus during 2008-09 crisis

December 6, 2008

Tax cuts: Central excise duty was cut by four percentage points to 10 per cent till March 31, 2009.

January 24, 2009

Tax cuts: Central excise duty was cut by another two percentage points to eight per cent. The earlier four percentage point cut was extended beyond March, 31, 2008.

Service tax was cut by two percentage points from 12 per cent to 10 per cent.