Home Economy Modi govt overestimated nominal GDP, tax buoyancy. Result — huge tax collection...

Modi govt overestimated nominal GDP, tax buoyancy. Result — huge tax collection shortfall

India’s tax shortfall for fiscal 2019 is estimated at Rs 1.5 lakh crore, despite the absence of any macroeconomic shocks.

Remya Nair
A sign outside of the income tax office in Kolkata | Photo: Brent Lewin | Bloomberg

New Delhi: India’s tax collections in the 2018-19 financial year fell way short of target as the Modi government overestimated both the nominal GDP growth as well as tax buoyancy.

The shortfall is estimated to be over Rs 1.5 lakh crore, from both the budget and the revised tax collections in 2018-19, reported news daily Business Standard.

Despite the absence of any macroeconomic shocks — domestic and global — the huge shortfall has led to questions on the way tax collections are estimated by the finance ministry.

The figures also mean that the tax to GDP ratio estimated at 11.9 per cent, according to revised estimates for FY19, could now fall to around 11-11.3 per cent, levels prevailing in the year of demonetisation.

Overestimation of nominal GDP

Economists point out that for 2018-19, the Modi government seems to have gone wrong on both the GDP as well as inflation estimates.

Nominal GDP is arrived at by including both the real GDP as well as the inflation levels.

In the budget for 2018-19, the government estimated the nominal GDP growth to be at 11.5 per cent. However, real GDP is expected to be below 7 per cent for 2018-19 and inflation based on the consumer price inflation is at 3.43 per cent.

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“The slower real GDP growth and the lower inflation levels mean that nominal GDP growth will be at least a percentage point lower in 2018-19 than estimated in the budget. The government seems to have got both the GDP and the inflation numbers wrong,” said N.R. Bhanumurthy, professor, National Institute of Public Finance and policy.

“To be fair to the government, it is not easy to arrive at what would be the GDP growth for the next year so many months before,” added Bhanumurthy.

The slowdown in India’s economic growth impacted direct and indirect tax collections the past fiscal. The direct tax collections, which were revised upwards to Rs 12 lakh crore from 11.5 lakh crore, are estimated to have fallen well short of Rs 11.5 lakh crore.

The central goods and services tax (GST) collections, which were revised downwards by Rs 1 lakh crore to around Rs 5.03 lakh crore, are estimated to have further fallen to Rs 4.8 lakh crore.


Also readNew GDP series, which showed Modi govt growth higher than UPA, based on flawed data: NSSO


Overoptimistic tax buoyancy numbers

In its 2018-19 budget estimates, the government also estimated a much higher tax buoyancy as it looked to push up the tax to GDP ratio.

The government estimated that the gross tax collections for FY19 will grow at more than 18 per cent over the previous financial year. However, with a nominal GDP growth of 11.5 per cent, the government estimated the tax buoyancy to be at around 1.5.

For 2017-18, the tax buoyancy stood 1.4, compared to FY17 budget estimates, and at at 1.03, compared to FY17 revised estimates.

“The tax buoyancy estimates by the government have been optimistic. The problem is compounded by the fact that the growth numbers have not panned out as per budget estimates with inflation undershooting projections and real GDP falling short of estimates,” said Devendra Pant, chief economist, India Ratings.

Bhanumurthy pointed out that the government assumed tax buoyancy levels to be similar to what was seen in 2017-18 when, in the aftermath of demonetisation and the implementation of the GST, the number of tax assessees had gone up leading to an increase in tax collections.

“But this has not happened. In fact, there are reports that the tax returns filed have come down in 2018-19,” he said.

The number of e-returns filed in 2018-19 fell by 6 lakh to 6.68 crore in 2018-19, after the high of 6.74 crore registered post-demonetisation in 2017-18.

In the revised estimates for 2018-19, tax to GDP ratio was estimated at 11.9 per cent, as against 11.4 per cent in 2017-18 and 11.3 per cent in 2016-17.

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3 COMMENTS

  1. My senior maid’s bus ride home in the evening takes her down Colaba Causeway. For several years now, she has been telling me, Saheb, shops mein customers hi nahin hain. Wonder how North Block assesses the state of the economy.

    • I think you are talking like a fool. Shops without a customer, you mean you are running your house without grocery? You heard this election, no talk of mahngai? Last election that was the biggest issue.
      Dal, which touched 200/- is less than 100/-. That too after 2 successive draught after Modi govt. You are lucky to have midi as PM, otherwise today cost would have been like Pakistan.

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