Low tax collections may force government to cut expenditure

Over the years, tax collections have always fallen short of the Union Budget estimates. This year too, the central government is likely to mop up Rs 50,000 crore less than the Rs 14.5 lakh crore it had estimated in Budget 2015/16. The primary reason for the 3.5 per cent shortfall is the less-than-expected direct tax collections from companies (corporate tax), individuals and firms.

The government had expected a 16.5 per cent increase in overall (direct and indirect) tax collections over the revenue generated in 2014/15 in its 2015/16 budgetary projections. The growth, so far, without considering the additional resource mobilisation efforts of the finance ministry, has been just over 12 per cent. While direct tax collections till September grew 12 per cent, growth in indirect tax collections, excluding the extra money earned from special measures such as introduction of additional excise duty on petroleum products, roll back of fiscal sops given to some sectors and hike in service tax, etc., was 12.2 per cent till August 2015. The gap narrowed because of the additional resource mobilisation efforts, which saw overall indirect tax collections grow 36.5 per cent, thereby, narrowing the overall tax collection gap to just five per cent of the Budget estimate.

Considering the gap between the Budget estimates and actual collections during 2014/15 was 8.7 per cent, the possibility of a five per cent shortfall in tax collections during 2015/16 might look marginal, but there are other reasons why it can be tricky.

One of the causalities of below-the-target revenue collections is a cut in the expenditure that gets budgeted for the year. In other words, one has to balance the government's account book and control the overall fiscal deficit.

The moment the government realised that the actual overall tax revenues will be eight per cent lower than the Budget estimates of 2014/15, the actual expenditure was also revised to 6.7 per cent lower than what was budgeted for the year. If Rs 2.27 lakh crore was the budgetary allocation for capital expenditure in Budget 2014/15, the revised numbers talked about spending Rs 1.92 lakh crore - a cut of Rs 46,826 crore in the central plan, and Rs 60,240 crore in central assistance plans for states and Union Territories. The resulting fall in outlays was reflected across departments and ministries during 2014/15.

If the central government is determined to hold on to its fiscal deficit targets, gaps in the revenue targets for 2015/16 will have to be filled by rationalisation of expenditure. This has become all the more important because PSU disinvestment for the current year has so far been widely off the mark. The Black Money Act, which was expected to fetch considerable one-time tax and penalty revenues for the government, has brought in just Rs 4,147 crore, hardly sufficient to plug the Rs 50,000 crore gap in revenue estimates in the Budget.

But, will there be a cut in expenditure? It may not happen during the current financial year, say finance ministry officials.

"In spite of 10 per cent increase in tax devolution to the states, we have achieved over 30 per cent increase in plan capital expenditure. We are on course to achieving the fiscal deficit target (3.9 per cent of the GDP)," says Finance Secretary Ratan P. Watal. According to him, the government is hoping to meet its fiscal target without cutting down on expenditure because "the budgetary estimates, this time, has been more realistic".

The reduction in crude oil prices and the resultant subsidy burden has also played a major role in enabling the government to keep its fiscal deficit targets intact.

In a recent press conference, top finance ministry officials were at pains to explain how infrastructure spending has picked up on the back of accelerated government spending on highways, railways and the power sector. What needs to be seen, though, is the result of what the ministry officials term as a "systematic restructuring of the expenditure" which they have been carrying out over the past one year.

The government says that it is continuing to rationalise central sector schemes and programmes in the run-up to the Union Budget 2016/17. If rationalisation means trimming of expenses and budgetary outlay of flagship schemes (which is what it normally means), revenue collections during the first half of the financial year will hold the key to the expenditure tweaks that may happen in the coming months.