The optimism among policymakers and economists about economic growth gaining momentum failed to find reflection in the governments indirect tax collection figures, with excise collection dropping 17% in September from the year-ago period despite clear evidence of a pick-up in manufacturing.
The fall in excise collections, or tax on factory output, coming close on the heels of a muted 2% growth in direct tax collections for the April-September period could result in the fiscal deficit overshooting the budgeted 6.8% of the gross domestic product (GDP) in the current financial year.
Excise mopup fell to Rs 8,180 crore in September 2009, while the collection in the April-September period slipped by 21% from the corresponding period last year to Rs 43,230 crore, said a finance ministry official who asked not to be named.
The Prime Ministers economic advisory council headed by former Reserve Bank of India governor C Rangarajan had said last week that it expected the countrys gross domestic product (GDP) to expand by 6.5% in 2009-10 due to better-than-expected growth in industrial growth.
This is the most optimistic figure from a government body in a year. The Union budget has targeted an excise collection of Rs 1,06,477 crore in the budget for the fiscal 2009-10. The mopup will have to increase nearly 20% in the rest of the fiscal for the government to meet this target.
Part of the decline in excise collections can be attributed to a cut in cenvat rate from 16% to 8% in the last financial by the government, as part of the stimulus measures to tide over the economic downturn. The government had, therefore, budgeted a 2% decline in excise collections for 2009-10, compared with the previous fiscal year.
A strong 22% growth in excise collections in August had raised hopes of excise collections beating estimates. Factory output had grown at 10.2% in August 2009.
The disappointing excise collections in September give reason to doubt the output growth data. Excise collections peaked at Rs 1,23,000 crore in 2007-08. In the four-year period before that the collections grew at a average compounded rate of only 8%, well below the annual 16% growth in manufacturing for the same period.
A number of exemptions and evasions has largely been the reason for this. The introduction of the goods and services tax (GST) regime is expected to check excise evasion to a large extent.
Indirect tax collections from other heads also have been disappointing. Customs collections were down 32% in April-September, 2009 to Rs 38,810 crore and service tax mopup was down 4.0% to Rs 22,920 crore. Customs collections and service tax collections stood at Rs 7,600 crore and Rs 4,020 crore in September, showing falls of 32% and 15 %, respectively.
Unlike excise, customs and service tax collections had grown at double digit rates until the global financial meltdown hit India in September last year.
What is puzzling the policymakers is that tax collections continue to languish despite signs of a pickup in economic activity. Direct tax collections also have grown by less than 2% in April-October 23, 2009 period, even though advance corporate tax payments were up by 14.7% to Rs 44,010 crore in second quarter.
Economists say that tax collections should pick up in the second half as economy had already started to look up. If the industry is doing well, excise collections should also do well. But, considering that the government had drastically cut excise duty rates, the impact of industrial growth may not be showing up or there could be some other blip, said DK Joshi, principal economist with rating agency Crisil.
In the last few years, the government has shifted its focus towards direct taxes, he said.