Taxes are anything but certain for Prime Minister Narendra Modi.

Faced with a slump in demand after his shock clampdown on cash, he’s expected to lower taxes in the 1 February budget to spur consumption. The risk is that a cut will rob Modi of a short-term revenue spurt, which his administration had been touting as proof of success of the currency policy change.

“Economic growth is unlikely to accelerate in the near term on its own so the situation for the government is such that in order to improve their own credibility, the government will have to improve demand for goods and services,” said Nihal Kothari, executive director at tax firm Khaitan and Co. in Mumbai. “So the personal income tax slabs or rate may be reduced in the budget to give higher purchasing power to consumers.”

We assess the sustainability of the tax revenue surge amid expectations from the budget.

Indirect taxes

Net revenue from customs, excise and service taxes rose 25% in April-December from a year earlier, meeting 81% of the government’s budgeted target for the year through 31 March. The bulk of this however came from a surge in excise collections, underpinned by nine increases in the levy on gasoline and diesel since Modi came to power in 2014. Imposing this tax was relatively simple while global oil prices were low, but could become politically difficult as crude costs rebound.

“The government may be forced to roll back some of the excise increases on fuel as this could feed into inflation,” Kothari said. “So additional tax revenues will come from greater compliance as we near the GST regime and the threat of scrutiny rather than economic growth.”

Direct taxes

Net revenue from corporation and income taxes rose 15.1% April-November from a year earlier, helping meet about 49% of the government’s budget goal. Collections rose to 65% of the target in December, the government said on 9 January.

What’s unclear, though, is how much of this came from two amnesty programs offered to citizens, implying a one-time gain in collections. Another distortion is the government’s decision to allow corporations to collect tax payments in invalidated bills, which may have prompted early payments.

“One of the main reasons for India’s stunted tax base is the lack of trust between the government and taxpayers,” analysts at Kotak, including Sanjeev Prasad in Mumbai, wrote in a 17 January report. “We expect the government to gradually deliver on its vision of moderate tax rates and a broad-based taxation system over the next one or two years with a start in the union budget on 1 February, 2017.”