MacroScan - Taxes and Deficits : Where are the Real Problems

Ever since Chidambaram's dream-turned-to-nightmare Budget of 1997-98, the Central Government's Budgets have been characterised not only by an unwillingness to raise more taxes, but also by a subsequent inability to reach the levels projected in the Budget in terms of actual tax receipts. Indeed, the failure of revenues to reach the Budget targets has been a significant feature of Yashwant Sinha's Budgets as well. This year promises to be no exception, if current trends are accurate indicators. In the first eight months of the year, tax revenues were well below expectation, and even lower than for the corresponding period in the previous year, which was finally marked by a very substantial shortfall over the whole year. Of course, data just released by the Ministry of Finance do suggest that there has been some increase in tax receipts in December, which would cause the picture to be less gloomy.
Chart 1 >>

Chart 1 shows the picture for various types of tax receipts over April-December 1998 and 1999 respectively. The month of December alone experienced a 28 per cent increase in total tax collections over December 1998, and this has contributed to a very respectable increase of 17 per cent over the entire period April-December 1999 over the same months of the previous year.

As Chart 1 shows, this increase has been spread across the various categories. Indirect taxes show the highest rate of increase, but it should be noted, however, that much of the increase in indirect taxes has come about simply because of the rise in international oil prices, which has allowed for higher duty payments at a given ad valorem rate.

However, even corporate taxes, which had hitherto been rather flat, have increased by 13 per cent. Predictably, this news has been hailed by official spokespersons as being positive on two levels : first, because it suggests that industrial recovery is now under way; and second, because more revenue intake presumably implies a lower fiscal deficit, which is currently seen as unambiguously good in official circles.

But even though the current level of tax receipts represents a substantial improvement over last year's performance over these months, it is still much short of the Budget projections. The latest data available from the office of the Controller General of Accounts, which is the final authority on Indian fiscal information, covers only the period to November 1999. But this suggests that the gap between projected and actual receipts in the current year is still at least as large as it was last year, when a major shortfall was ultimately the result.
Chart 2 >>

Chart 2 displays the revenue receipts of the Central Government over April-November 1999, relative to the Budget estimates. Especially for net tax revenue, in the first eight months of the financial year, receipts were less than half of the Budget expectation. In Chart 3 the per cent of actual receipts to Budget estimates is shown for the period April-November for the current and previous fiscal years. It is clear that even in comparison to a famously "bad" year in terms of failure to meet tax revenue targets, the first eight months of the current year have been no better.

The recovery in December 1999 is likely to make this picture only slightly better overall. This is because December is in any case typically a month in which tax collections pick up, and even in 1998-99 there was an increase especially in this month. This is evident from Chart 4 which shows the monthly pattern of tax collection.
Chart 3 >> Chart 4 >>