Direct Taxes Likely To Cushion Shortfall In Indirect Taxes: Economists

Direct taxes are expected to do most of the heavy lifting towards meeting the fiscal math in the current financial year, according to economists, with some expecting it to exceed budget targets by Rs 80,000 to Rs 1.1 lakh crore.

The economists BQ Prime spoke with agreed that despite shortfalls, the Union government will restrict its fiscal deficit to 5.9% of the gross domestic product, subject to tightening of purse strings.

The government has sought funds for an additional expenditure of Rs 58,378 crore on Wednesday as part of the first batch of supplementary demands out of a total excess expenditure of Rs 1.29 lakh crore.

A collection of 52% of the corporate tax and 58% of the income tax till October indicates that direct taxes exhibit potential on meeting the budget targets. Given its current pace, economists expect direct taxes to exceed budget estimates of Rs 18.23 lakh crore by Rs 85,000–1,10,000 crore. Against the revised estimates of the previous year, these are expected to grow 10.5% in line with the nominal GDP expectation.

The asking rate to meet the budget estimate for the remaining five months of the fiscal is quite modest, according to Madhavi Arora, lead economist at Emkay Global Financial Services Ltd. Direct taxes only need to rise by 0.3% year-on-year to meet the budget estimate, with corporate taxes needing to grow 6%. Income tax can actually decline 8% and still meet the budget target, Arora told BQ Prime.

Speaking to BQ Prime in early October, Central Board of Direct Taxes Chairperson Nitin Gupta also had expressed optimism in exceeding budget targets.

Corporate taxes were growing at a net rate of 12.3%, while personal taxes grew at a net rate of 32%, putting the overall growth rate at 21.82%, he had said.

Indirect taxes may fail to meet budget expectations due to a tepid growth in customs duty and decline in the excise-duty collections.

Arora estimates that indirect tax receipts have been weak, pegging the asking rate for indirect taxes at 19% year-on-year over the next five months.

Customs duty collections have risen just 1% YoY due to lower commodity prices despite trade volumes being largely stable over the last year. Excise collections are down 9% and goods and services tax is up 8% versus the budgeted 12%, according to Arora.

Fiscal risks stem from familiar corners like disinvestment receipts, while moderating inflation and growth environment may pose additional risks.

The government has garnered disinvestment receipts of Rs 8,859 crore so far against a budget target of Rs 51,000 crore. Following Coal India Ltd., Hindustan Aeronautics Ltd., Housing And Urban Development Corp Ltd., Rail Vikas Nigam Ld. and SJVN Ltd., it is looking to sell 8% of its stake in Indian Railway Construction International Ltd.

Other than divestment, the other risk is the nominal GDP growth tracking lower than the budget estimate, according to Gaura Sengupta, economist at IDFC First Bank. The nominal GDP in the second quarter came in at 9.1%, growing from 8% in the first quarter.

For the full fiscal, Sengupta expects excise duties to reach closer to Rs 3 lakh crore against a target of Rs 3.39 lakh crore; custom duties at Rs 2.16 lakh crore versus Rs 2.33 lakh crore; and GST collections closer to Rs 9.2 lakh crore against Rs 9.56 lakh crore, including cess.

However, she maintained that the fiscal deficit is not likely to breach the targeted 5.9% of the GDP, subject to expenditure moderation.

Aditi Nayar, chief economist at ICRA Ltd., said though direct taxes will surpass the budget estimate by Rs 85,000 crore, a portion of this will be absorbed by lower-than-budgeted excise-duty collections, leaving a gross upside of around Rs 50,000 crore.

Setting aside the additional devolution to the states, ICRA estimates net tax revenues to exceed the budget estimates by a modest Rs 30,000 crore, only to be offset by a similar shortfall in disinvestment proceeds, according to Nayar.

She expects central GST to exceed estimates by around Rs 25,000 crore, which would offset shortfall in customs duty.

In a report on Tuesday, Kaushik Das, chief economist for India & South Asia at Deutsche Bank, said the expected path to fiscal deficit will likely narrow down from 5.9% of the GDP to 5.25% in the next fiscal and 4.5% in fiscal 2026, estimating much of the fiscal consolidation to pick up after the general election.