Mysterious tax collection projections

by Manasi Swamy

Union Budget 2021-22 has revised the Central Government’s gross tax revenue estimate for the ongoing fiscal to Rs.19 trillion from Rs.24.2 trillion budgeted in February 2020. This is a steep cut of Rs.5.2 trillion. The revised estimates imply a 5.5 per cent contraction in gross tax receipts compared to 2019-20. The budget projects tax receipts to rise by 16.7 per cent to Rs.22.2 trillion in 2021-22. The decline in annual tax collections projected for 2020-21 and the rise projected for 2021-22 are in sync with the projections of a 4.3 per cent contraction in the economy this year and a 14.4 per cent expansion in the next year. What perplexes us is the 10.3 per cent y-o-y contraction in tax receipts projected for the March 2021 quarter.

The Centre’s tax receipts had started languishing from the second half of 2019-20. Gross tax receipts declined year-on-year by 10.6 per cent in the December 2019 quarter, followed by a 4.5 per cent contraction in the March 2020 quarter. The fall was largely led by a sharp contraction in corporate tax collections caused by a steep rate cut from 30 per cent to 22 per cent announced in September 2019. Income tax and customs duty collections also started weakening from the December 2019 quarter which were later joined by goods and services tax (GST) in the March 2020 quarter.

The y-o-y contraction in tax receipts, but obvious, aggravated to 32.6 per cent in the June 2020 quarter as the country observed the strictest lockdown in the world to arrest the spread of Covid-19. The quarter also witnessed the worst ever contraction in nominal GDP of 22.6 per cent. Besides, the impact of corporate tax rate cut also lingered.

In the September 2020 quarter, y-o-y contraction in gross tax receipts alleviated to 13.1 per cent, as the unlock process began and the GDP contraction reduced to four per cent in nominal terms.

In the December 2020 quarter, gross tax receipts grew y-o-y by a robust 33.1 per cent. At Rs.6.2 trillion, these were the highest receipts garnered by the government in any of the December quarters so far. Buoyed by the festive demand, collections of the three main indirect taxes GST, excise duty and customs duty increased y-o-y by a steep 35.5 per cent. Direct taxes income tax and corporate tax also reported a steep 30.5 per cent increase in collections, which was mainly driven by a buoyancy in advance tax collections.

The story till here looks perfect. The twist comes in the last quarter. The Rs.19 trillion revised estimate of gross tax receipts for 2020-21 implies that receipts in the last quarter would be of the order of Rs.5.6 trillion. This is 8.9 per cent lower than the gross tax receipts collected in the December 2020 quarter, which is a sharp deviation from the trend. Tax collections pick-up in the last quarter every year. The average growth in collections during January-March over October-December in the last 10 years has been 33 per cent. Moreover, even 2019-20 had rendered a 35.2 per cent rise in gross tax receipts in the March 2020 quarter over the December 2019 quarter despite the Covid-19 pandemic and the lockdown hitting the economy in the fag end.

Moreover, gross tax receipts projected for the March 2021 quarter are 10.3 per cent lower than their year-ago level. Income tax receipts are projected to shrink y-o-y by 8.3 per cent to Rs.1.5 trillion, while corporate tax collections are projected to slump by 28.8 per cent to Rs.1.3 trillion. The stock market which has given a thumbs up to the budget and has risen by over nine per cent in the first four days of February 2021 seems to have ignored this huge contraction in corporate tax collections and therefore an implied fall in corporate profits.

Among indirect taxes, goods and services tax (GST) is projected to take a big beating in the March 2021 quarter, with gross receipts falling y-o-y by a steep 28.8 per cent to Rs.1.3 trillion. Ironically, the Ministry of Finance itself announced a few days back that GST return filings were at a record high in January 2021. Customs duty and excise duty receipts, on the other hand, are projected to grow by a robust 34.3 per cent and 44.9 per cent, respectively.

The 2021-22 target of tax revenues rests on these bizarre estimates for 2020-21. The government has budgeted for 16.7 per cent growth in gross tax collections to Rs.22.2 trillion in 2021-22. The growth projected in all major taxes except excise duty is uniform. It estimates both direct taxes to grow at a similar rate - income tax by 22.3 per cent and corporate by 23 per cent in 2021-22. No change in the tax structure of either implies that both personal incomes and corporate profits are expected to grow at the same pace in 2021-22. The budget projects a similar growth in indirect taxes, a 22.3 per cent rise in GST and a 21.4 per cent rise in customs duty collections too. Direct taxes, which are levied on income, and indirect taxes, which are levied on consumption, can grow at the same pace only when the growth of the economy is egalitarian. In the recent past, India has not seen all major taxes grow at the same pace.

Unemployment Rate (30-DAY MVG. AVG.)
Per cent
6.8 0.0
Consumer Sentiments Index
Base September-December 2015
55.7 +0.3
Consumer Expectations Index
Base September-December 2015
57.7 0.0
Current Economic Conditions Index
Base September-December 2015
52.5 +0.9
Quarterly CapEx Aggregates
(Rs.trillion) Mar 20 Jun 20 Sep 20 Dec 20
New projects 3.83 0.91 1.33 0.93
Completed projects 1.73 0.26 0.72 0.69
Stalled projects 0.73 0.11 0.08 0.30
Revived projects 0.42 0.68 0.29 0.11
Implementation stalled projects 10.22 0.09 0.07 0.12
Updated on: 07 Mar 2021 8:28PM
Quarterly Financials of Listed Companies
(% change) Mar 20 Jun 20 Sep 20 Dec 20
All listed Companies
 Income -5.0 -27.6 -6.3 1.5
 Expenses -1.8 -27.9 -10.3 -0.1
 Net profit -51.1 -40.3 47.2 58.8
 PAT margin (%) 2.2 5.3 8.4 8.6
 Count of Cos. 4,376 4,373 4,372 4,323
Non-financial Companies
 Income -9.0 -37.4 -10.5 0.0
 Expenses -4.8 -37.7 -14.2 -1.0
 Net profit -52.2 -56.0 31.5 55.7
 PAT margin (%) 3.1 4.5 8.1 9.0
 Net fixed assets 13.5 5.8
 Current assets 2.5 0.7
 Current liabilities 5.4 -2.8
 Borrowings 15.8 8.1
 Reserves & surplus 1.7 4.4
 Count of Cos. 3,257 3,255 3,254 3,223
Numbers are net of P&E
Updated on: 07 Mar 2021 8:28PM
Annual Financials of All Companies
(% change) FY18 FY19 FY20
All Companies
 Income 8.5 13.4 0.0
 Expenses 9.9 13.8 0.1
 Net profit -40.6 15.8 -10.5
 PAT margin (%) 1.9 2.2 3.7
 Assets 10.9 9.6 9.3
 Net worth 7.3 8.4 4.7
 RONW (%) 3.3 3.9 5.4
 Count of Cos. 30,466 29,959 11,603
Non-financial Companies
 Income 8.6 14.1 -2.9
 Expenses 8.8 14.3 -2.3
 Net profit -10.3 21.3 -22.4
 PAT margin (%) 2.7 3.0 3.6
 Net fixed assets 7.2 5.5 12.0
 Net worth 5.9 8.0 1.7
 RONW (%) 5.5 6.5 6.4
 Debt / Equity (times) 1.0 1.0 0.9
 Interest cover (times) 2.1 2.3 2.4
 Net working capital cycle (days) 79 72 61
 Count of Cos. 24,480 24,021 8,388
Numbers are net of P&E
Updated on: 05 Mar 2021 8:23AM