Revenue from direct and indirect taxes of the government has grown at a decent pace in FY19 but not sufficient for the Narendra Modi administration to make ends meet as welfare spending spiralled on account of new commitments like giving income support to farmers.

This trend could become more pronounced in FY20 as the budget to be presented on 5 July is likely to give a stimulus to employment—creating sectors and consolidate social welfare schemes while the tax base expansion could take time. This could force the government to scale up sale of shares in state-run companies and explore other sources of non-tax revenue.

Though tax collections fell short of targets, they have shown robust growth and can continue to swell, according to experts. Receipts from corporate and personal income tax receipts, for example, touched ?11.25 lakh crore in FY19, according to data from the Comptroller General of Accounts (CGA), showing a growth rate of over 12% from the ?10 lakh crore collected a year ago. However, the collection was below the revised target of ?12 lakh crore for FY19. This makes the ?13.8 lakh crore target for personal income and corporate tax receipts set in the interim budget appear steep, requiring 23% growth over what was collected in FY19.

In indirect taxes, goods and services tax (GST) receipts have improved in FY19 compared to FY18, the first year of indirect tax reforms. Central government’s average monthly GST receipts have gone up from about ?25,400 crore in FY18 to ?38,128 crore in FY19. Experts said the trend is encouraging as the collections have gone up despite large scale GST rate reductions on several mass-use items.

Collections from excise duty on products which are outside GST such as petrol and diesel fell 11% short of the revised target of ?2.59 lakh crore for FY19. Customs duty collections too fell short of the ?1.3 lakh crore revised target for FY19 by over 9%, CGA data showed. “If compliance enforcement steps are taken in earnest and there are no further tax rate cuts, it is only natural that tax collections will further improve," said M.S. Mani, partner at Deloitte India.

Analysts said it is time next-generation tax reforms are rolled out to raise direct and indirect tax buoyancy—the ratio of growth rate of tax collections to economic growth rate. GST reforms could include lowering the number of tax slabs and bringing in sectors like petroleum that were left out in the first round.

“Corporate and personal income tax reforms may aim at enhancing their buoyancy by rationalizing the related tax expenditures. This requires a review of various exemptions and deductions as well as reduction and rationalization of tax rates so as to improve the overall compliance," said D.K. Srivastava, chief policy adviser, EY India, on a note issued on 26 June on economy.

An uptick in economic growth rate could improve tax collections. GDP growth had cooled down to a five-year low of 5.8% in the fourth quarter of FY19, official data showed in May. The Reserve Bank of India had on 6 June lowered its growth forecast for FY20 to 7% from earlier 7.2% while expressing concerns about a sharp slowdown in investment activity.