Impact: Negative (Fiscal Deficit, Government Expenditure)

Brief: India’s net tax revenue has been growing at 7.45% in FY19 YTD, which was 21% during the same period the previous year. Indirect tax such custom duties, exercise duties and service tax has been recording de-growth of (-)26%, (-)22.6, and (-)93.8% respectively in FY19YTD. As per our assessment, the fiscal deficit is likely to reach Rs.6.45 trillion in FY19 that will be 3.6% of GDP.

India’s net tax revenue has been growing at 7.45% in FY19 YTD, which was 21% during the same period the previous year. For past three years, the net tax revenue has been expanding at around 16%. The early trend shows this year may be an exception. The major sources of tax revenue are income tax and corporate tax. Both the tax sources account for 77% of overall tax revenue. Income tax has been expanding at a pace of close to 16% in first half of the year for past four years. The direct tax collection for FY19 is in line with the historical trend. Therefore, income tax collection is likely to remain healthy in FY19 as well.

Similarly, corporate tax has been growing at 17.2% in FY19 YTD (Apr-Sept) as compared to 11.3% during the same period a year earlier. As per our assessment, sales of manufacturing sector have registered a strong growth of 24% in H1, 2019. The number was 10% in H1, FY18 and 15% in H2, FY18. Therefore, strong growth in sales is reflecting in corporate tax collection as well.

However, the main culprits of slower growth in tax revenue are fall in collection of duties and service tax. The indirect taxes such as custom duties, exercise duties and service tax have been recording de-growth of (-)26%, (-)22.6, and (-)93.8% respectively in FY19 YTD. In recent months, the higher volatility in crude oil price and exchange rate has enforced both the centre and states to trim the duty on petroleum products. In addition, to boost the MSME sector, government has revised down GST rate in a range of five percentage point to thirteen percentage points in various sectors. 

To put thing into perspective, a slower growth in tax collection is mounting pressure on fiscal discipline. As per our assessment, a 15% growth in tax revenue will cause the fiscal deficit to reach Rs.6.45 trillion in FY19. As per budget estimation, fiscal deficit is expected at Rs. 6.24 trillion for current fiscal year. Therefore, fiscal deficit of Rs.6.45 trillion will cause the fiscal deficit to GDP ratio to increase by 30 bps to 3.6% if expenditure did to trim accordingly. This will break the last two years’ trend as central government has been maintaining fiscal deficit at 3.5% of GDP.