According to him, the Centre could consider administrative measures to boost tax collections next fiscal. However, any roll-back of exemptions should be avoided as it could have an impact on growth.
Even as tax collections have shown strong growth this fiscal with expectations that it would overshoot the Budget target by a wide margin, the Centre is expected to remain committed to fiscal prudence in the Union Budget 2023-24 and may look at fresh measures to boost tax revenue.
While there is little scope for hiking the rates on the direct tax side, as it will go counter to the policy of keeping rates benign and the immediate requirement of boosting consumption, the government may choose to go for fewer tax handouts. In the pre-Budget meetings with finance minister Nirmala Sitharaman, the industry has called for tax rebates and concessions to help prop up domestic demand.
The Centre could also take a harder look at weeding out any remaining exemptions and focus on improving compliance and plugging tax leakages
The sharp growth in tax receipts in the last two financial years has a lot to do with the steps taken by the government to improve compliance in the wake of the subdued revenues in the pandemic years, but it is also partly a statistical mirage and aided in good measure by elevated inflation.
The Budget Estimate for gross tax receipts in 2022-23 was very conservative; it involves a flat growth over the actual collections in the last financial year.
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So the tax buoyancy is expected to remain rather muted at 1.1 in FY23, even with the sharp year-on-year growth in collections. Retaining the same level of growth for the next fiscal will be a challenge, as gains of compliance improvement have mostly been realised.
Given the commitment to the glide path of fiscal consolidation and the need to step up on capital expenditure to ensure sustained economic recovery, the government will have no other way but to avoid offering any major tax reliefs in the Budget, analysts said.
Gross tax revenue collection during the first half of 2022-23 increased by 17.6% compared to last year, on account of higher revenue from all major tax heads except Customs and excise duty.
Revenue secretary Tarun Bajaj said in a recent interview that tax collection is expected to exceed the Budget Estimate by nearly Rs 4 trillion in 2022-23 to Rs 31.5 trillion on the back of buoyant income tax, Customs duty and GST mop-up.
However, experts point out that a part of the higher collection would also be due to a near flat growth in tax collections in the Budget Estimate, as well as elevated inflation.
Tax revenue is likely to be about Rs 3.6 trillion higher than the Budget Estimate for 2022-23. This would mean a revenue buoyancy of about 1.1 this fiscal as nominal GDP growth rate is much higher than what was estimated,” said DK Srivastava, chief policy advisor, EY India.
According to him, the Centre could consider administrative measures to boost tax collections next fiscal. However, any roll-back of exemptions should be avoided as it could have an impact on growth.
Madan Sabnavis, chief economist, Bank of Baroda, also noted that tax revenues have increased largely due to inflationary pressures this fiscal and warned that there could be moderation in collections in 2023-24, as the rupee stabilises and the economy possibly slows down.
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“There is not much that can be done to boost tax revenue because collections would be impacted if there is slower economic growth. Tax compliance has improved with GST and the base has widened,” he said.
The Budget 2022-23 had estimated gross tax revenue at Rs 27.57 trillion, with the Centre’s net tax revenue post devolution to States pegged at Rs 19.34 trillion.
Sandeep Chaufla, partner, Price Waterhouse & Co, noted that there is not much scope for weeding out exemptions as the government has already taken a conscious decision that it will not give fresh exemptions, and the existing ones will be grandfathered.
“However, possible measures to improve tax buoyancy may include increased focus on compliance, as well as plugging of tax leakages through use of technology and co-relating information from other sources,” he said.
