Taxes grew just 11% in H1 vs full-year target of 17.8%
You can dismiss the dismal half-year tax collections—taxes grew just 11% in Apr-Sept versus the budget’s full-year target growth of 17.8%—by pointing out that it is early days; in any case, tax collections tend to do better in the second half of the year as economic activity picks up. In the case of indirect taxes, collections in H2 were 29% higher than H1 in FY12, 43% in FY13 and 27% in FY14. There are, however, two problems with such assumptions. One, even RBI has said Q3 growth will be worse as the impact of the poor agriculture growth needs to be factored in; the IIP doesn’t show much sign of recovery even though the unusually small August number, at 0.4%, had probably more to do with a data glitch. In any case, with FY15 indirect tax growth budgeted at dramatically higher than in FY14—from 5.9% in FY14 to 15.3% for customs, from 1.7% to 15.4% for excise—things always looked a bit of a stretch considering FY15 GDP is not expected to be much higher than that for FY14.
Two, even if you assume indirect taxes grow at around 35% more in H2 as compared to H1, it still leaves you with a R56,000 crore shortfall in indirect taxes. Given how direct taxes grew 15% in H1 versus the target of 15.8% for the full year, there may not be a problem here. While sales have slowed for India Inc, the sharper fall in raw material costs have meant that bottomline continues to grow well, which is probably why advance tax collections in H1 have been far more robust than they were in the same period last year. Given that net direct taxes—that is, after refunds—grew only 7.1%, the taxman will have to continue to pressure firms to pay higher taxes upfront and refund them later. In which case, settling pending tax litigation will be critical—a target of clearing 60% of pending tax disputes has been set for the year. What will hurt the taxman’s efforts, though, is that several high-profile transfer pricing cases may not fructify—R3,000-odd crore of Vodafone is unlikely to come in, R5,000 crore from Shell may go the same way, and there are several more such.
If the tax part isn’t bad enough, the fact that the disinvestment wasn’t brought forward may mean the government may have missed out on the best of the market—it will be volatile now that FII activity has slowed—but in any case, bunching the sales isn’t a good idea. Getting the Coal India sale through will also require battling with unions who managed to stop the last disinvestment. Even more worrying, the telecom regulator has recommended that if the government is unable to get a lot more spectrum—and this requires a concerted effort on the past of three ministers—it is best not to hold auctions, on which the government has R27,000 crore riding. If the budget falls short—it will save money with the Food Security Act effectively postponed—and finance minister Arun Jaitley is forced to compress spending, that means Q4 GDP will also get affected and, in turn, will slow tax collections further. The finance ministry needs to get into overdrive.