In the last few years, the finance ministry has been projecting higher tax revenue increases in the Budget to keep the fiscal deficit target low. What this has meant, in effect, is the government going for expenditure compression in a big way to make up for the gap between the actual tax realisation and the estimates. This puts unnecessary pressure on the tax departments. The mid-year review of the finance ministry pointed out that the Budget overestimated the tax revenue by ‘R1.05 lakh crore or 0.84% of the likely FY15 GDP, which is broadly the shortfall that now looms ahead’. The net direct tax collection growth during the April-December period was just 7.4% as compared to the gross direct tax realisation target of 16%. Similarly, the growth in indirect taxes in this period grew by 6.7% only while the target is 26%.
The estimation of the tax mop-up growth target for FY16—to be announced in the Budget on February 28—therefore, will be keenly watched, especially because the government has already planned to raise the tax-to-GDP ratio in the next two years to 11.2% from 10% in FY14. This would in itself require an average tax growth of 17.7% in the next two years, on top of the 20% rise projected in FY15 over actual collections in FY14. The new GDP series doesn’t alter the situation. The Tax Administration Reforms Commission (TARC) is slated to suggest a revenue forecasting model before the Budget, but it would be probably too late in the day to take note of that for FY16 projections.