Gross tax collections were estimated to be over 30% lower till mid-June on the back of a sharp decline in advance tax payments, indicating a severe impact on businesses due to the coronavirus-induced lockdown. Companies and a certain segment of large individual taxpayers have to pay advance tax in four instalments with the first one to be paid by June 15. Although there is no official word on the collections as money is still flowing into government’s accounts, initial estimates suggest distress in corporate earnings during the first quarter of the current financial year and an acute fiscal strain for the Centre, as well as for states, which get an over 42% share of these taxes. The numbers are in line with GST collections during April and May, which were estimated at 45% of the average.

The government has budgeted for a 13% jump in the direct tax kitty, while overall revenue receipts were projected to increase by around 12%. But the first quarter numbers paint a grim picture for the Centre’s finances, given that advance tax payments on the corporation tax slumped 79% on a gross basis. Similarly, personal income tax (advance tax) was estimated to be 64% lower. “We should wait for a day or two for the full picture to emerge,” said an income tax officer.

The overall trend is a decline in earnings during the first quarter, led by the disruption in economic activity, following the nationwide lockdown from the last week of March. It was only after two months that factories and businesses started resuming operations. But even now, they are yet to get back to full capacity.

In addition, several large taxpayers such as oil companies will face pressure due to the large inventory of crude that they purchased at higher prices, but have been unable to unload due to a decline in demand. Although banks are expected to buck the trend in the first quarter, going forward they are seen to be vulnerable, given that asset quality pressures typically set in after a few quarters.

The tax numbers will also prompt the finance ministry to once again recalibrate its spending, with further belt-tightening expected as the Centre seeks to put a check on non-essential spending. The fiscal deficit target of 3.5% of GDP appears to be as good as missed, considering the economic contraction projected during the current financial year. Add to that higher spending and lower taxes.