Higher tax buoyancy augurs well for India's expansionary fiscal policy

Five factors, including massive hiring in tech sector, STT collections, are driving the revenues ahead of expectations

Seldom we see government revenues running ahead of the budgeted targets in India. But this year, it seems that rarity would strike. Despite the dreadful second Covid wave crippling economic activities during April-May of the current fiscal, a remarkable jump in central government revenues this year has left everyone astounded. During the first four months of this fiscal, the central government gross tax revenues have surged to Rs 7 trillion, nearly twice the gross tax revenues garnered during the same period last year. It’s plausible to argue that the sharp jump in revenues might be exaggerated due to the extremely low base of last year when Covid-19 first struck us, bringing the economy to a screeching halt. But even if we compare it with the pre-Covid period, government revenues are still up 29.1% against the first four months of 2019-20, which is no mean feat given the fact that economic activities were marred by partial lockdowns this year as well.

A further analysis of data divulges that the sharp rise in government revenues is quite broad-based and is not led by any one-off factors. For example, the personal income tax collections rose to Rs 1.61 trillion during April-July 2021-22, the highest-ever during the first four months of any fiscal year. Similarly, the corporate tax collections surged to Rs 1.46 trillion, again the highest-ever in the first four months of any fiscal year. The indirect tax collections have also surged to Rs 3.8 trillionn during the same period, up 19.5% against the same period last year.

Five factors are driving the revenues ahead of expectations. One, companies in the tech sector (software development, artificial intelligence, robotics and data science etc.) have offered enormous salary increments in a range of 20% to 60% this year in order to keep the mounting attrition rate under check. Tech firms are vying with each other to entice IT professionals who, out of the blue, are in huge demand due to the pandemic induced digital boost. This has given a fillip to personal income tax collections. Two, surge in Security Transaction Tax (STT) collection is also aiding personal income tax collections led by surge in stock markets. Three, corporates have seen an upward revision in their earnings led by pent up demand and cost saving measures embraced during the pandemic, resulting in higher tax payment to the government. Four, the excise duty hikes implemented when crude oil prices had fallen to around $30/bbl last year are also contributing to higher excise duty collections as petroleum products consumption returns to normalcy. Five, tax authorities tightening the screws on the compliance front is also one of the reasons for buoyancy in government revenues.

In total, the central government could garner Rs 3.2 trillion surplus revenue over and above the budgeted targets for 2021-22 on account of higher than budgeted collection from excise duty collections by Rs 90,100 crore, GST by Rs 78,000 crore, dividend from RBI and PSUs by Rs 70,100 crore, direct taxes by Rs 52,200 crore and custom duty collections by Rs 25,000 crore.

What would the government do with this windfall gain in revenue? From the Rs 3.2 trillion likely surplus revenues, around Rs 79,600 crore would go to states as part of devolution, which would help mend state government finances. Then the central government would have a net Rs 2.4 trillion surplus revenue over and above the budgeted revenue target for the year. To my mind, the government would have four options to spend this money. One, it can bump up spending on public infrastructure (capex), which would create employment and recuperate economic activities leading to lingering economic revival. Two, the government can cut taxes, especially excise duties on oil or lower GST rates for some categories in order to spur consumer demand. Three, the government might choose not to spend it at all and utilize it to reduce the fiscal deficit to 6% of GDP vs. the budgeted 6.8% of GDP in 2021-22, which would reduce market borrowings and would keep the bond yields low. Also, though the government sounds confident to achieve the magnanimous Rs. 1.75-trillion disinvestment target, a part of the surplus revenues could be used as a revenue shock absorber in case the LIC or BPCL divestment does not go through.

Buoyancy in government revenues is a welcome surprise and it would provide a fillip to government confidence to decide future course of action in order to put the economy back on track. In fact, it has started bearing fruits. The central government has sped up clearing all pending devolution to states, which in turn, would improve the payment cycle in the economy. Comfort on the revenue front has also helped the government to take the decision to scrap the retrospective taxation on the sale of assets in India by foreign entities executed before May 2012, which would enhance the long-term growth perspective of the economy. Also, the government jacked up Capex, which stood at Rs. 1.1tn during the first quarter of 2021-22, a whopping 77% higher than the first quarter of 2019-20 (pre-Covid period). 

To sum it up, the sun is indeed shining for the government finances. Higher than budgeted revenues are surely going to mend government’s impaired finances in 2021-22. Even though the naysayers are busy nit-picking, for the government, however, it’s time to cash in on the surplus revenues and put it to use to expedite economic revival.  

The writer is Senior  Economist, Spark Capital. Views expressed are his own.