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Demonetisation impact on government tax revenue marginal; direct tax personal income grew at above budget estimates
February, 13th 2017

Whatever the government or its detractors say, the demonetisation move announced on November 8 has had little impact either way on the Centre’s tax revenue in the current fiscal year.

Whatever the government or its detractors say, the demonetisation move announced on November 8 has had little impact either way on the Centre’s tax revenue in the current fiscal year. Neither has the two income disclosure schemes (IDS and PMGKY) unveiled during the year affected revenue much.

Direct taxes (corporate tax and personal income tax) grew at slightly above the budget estimates before the note swap and after it. The growth has picked up a bit further in November on the strength of personal income tax (advance tax payments using old notes could be a part-reason for this) but has since gradually slowed down, still keeping a slightly higher pace than before the note swap, at least until January.

But it is excise and service tax that have consistently outperformed official estimates by wide margins — these taxes seem to even better the substantially scaled up revised estimates (REs) announced in the recent Budget.

The extremely robust increase in excise collections and the solid growth in service tax in the year have almost entirely to do with rate hikes (2016-17 saw the full impact of incremental duty hikes on petroleum products and the increases in the rate at which services are taxed since 2015-16 Budget), rather than buoyancy. Unlike in the case of direct taxes, if at at all there is any impact of the note swap on excise and service tax, it could be negative (see table).

In short, the April-January 2016-17 tax collections — post-refunds and tax credits — grew 17.7% year-on-year, against the RE of 17.1% for the whole year. The originally budgeted growth was 10.74%. As for direct taxes, only 68.7% of the estimated revenue in the full year was achieved till January-end; however, a shortfall against the RE of R8.5 lakh crore is unlikely, as the March window for payment of advance taxes will be used by corporates, other firms and individuals. In April-January, corporate taxes grew 11.7% against the 2016-17 RE of 9% while personal income tax collections rose 21% against RE of 22.8%.

It is pertinent to mention that the government has kept the RE for corporate tax unchanged from the corresponding BE in the latest Budget and revised the personal income tax revenue only marginally from Rs 3.46 lakh crore (BE) to Rs 3.53 lakh crore (RE). The reason could be lack of clarity on nominal GDP growth for 2016-17 and, therefore, for the next year. The Centre has accounted for a robust 25% increase in personal income tax for 2017-18, hinging on additional tax revenue to be generated by income disclosures.

With 82.8% of the indirect tax receipts target (RE) for 2016-17 already achieved by January-end (the growth rates have been higher than REs), these could even overshoot the annual target.
The Centre’s gross tax revenue is estimated at Rs 17 lakh crore in 2016-17 as against Rs 14.6 lakh crore in 2015-16

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