On May 31, the central government released the provisional accounts for the first two months of FY22 and despite the COVID-19 second wave coupled with associated lockdowns, the finances look in much better shape.
Although a year-on-year comparison is meaningless due to an outlier previous year, the important aspect is that gross tax revenues have surged to its highest level in the last 22 years. Also, on comparing the cumulative figure for FY22 vis-à-vis the average of the previous five years excluding the pandemic year, the growth numbers for all key-heads look impressive. Though one can argue that better technological advancement in revenue collection could be one of the facilitators, multiple distinctive factors could be at play here — and, hence, a micro lens is required for better insights.
Let’s begin with the corporate tax collections. This was budgeted to grow by 22 percent in the Budget 2022 on the back of continuation of strong corporate profitability during FY22 led by strong top-line. A news report states that advance tax payments made by the top 100 corporates during April-June 2021 zoomed up by 14 percent, reflective of bullish projections of the bottom-line. Corporates are expecting a strong show after taking lessons from the first wave and corporate vaccination drives, which is thus reflecting in advance tax collections. But two points need some pondering: One, will these initial corporate projections hold amidst a likely broad-based expenditure increase? Two, what really has driven the collections in the first two months? This looks like an aberration as in seven out of the past 20 years, refunds were more than the receipts while the collection is almost two-and-a-half times more than the second-highest amount collected in the last two decades.
Personal income tax collections have witnessed a 57 percent growth during April-May ’21, compared with the average collections of the last five years. One comes across anecdotal evidence and some aggregate numbers of salary cuts, job losses, elevated unemployed numbers, which raises the question: Why this disconnect between personal income and taxes from individuals?
Here two observations stand out: One is that individuals in the large formal corporate space, who would have received bonuses, incentives and increments at the start of this fiscal (especially at the higher end of the corporate ladder), and second is the significant activities in stock markets leading to capital gains.
In case of the former, the focus is on those earnings more than say Rs 5 lakh annually in the corporate space. The income tax returns statistics assessment for 2018-19 shows that 2 percent of individual income tax return filers (having earnings more than Rs 5 lakh) pay almost 60 percent of tax paid by all individuals who have filed their returns. For the second explanation, there have been 1.42 crore new individual investors joining the stock market. A larger set of traders would have booked capital gains amidst heightened valuations and alternative revenue streams, steering the collections. These conjectures will need a review based on more disaggregated data going ahead.
The greatest number of questions are asked about the GST numbers and how the collections are so high when the consumption in the economy has been hit? The GST collections for June ’21 (pertaining to May ’21 activities) fell below Rs 1 lakh-crore for the first time in eight months. This is still impressive given the stringent localised lockdowns witnessed in May. Though improved technological compliance is one reason, an often-overlooked element is the behavioural shift among individuals which has been driving this. Especially in metropolitan areas, there have been significant shifts in consumption patterns.
Individuals have had their ‘work from home facility’ from a hotel, more frequent home delivery of foods items as dine-in is restricted, shifting from street-side shopping of multiple commodities (including discretionary spend) to e-commerce websites, increased consumption of FMCG goods as more people are working from home, mini-vacations/staycations, and so many such substitutions. Yes, the big-ticket items such as automobiles, rural sector demand, white and brown goods, and entertainment in multiplexes and malls have certainly been affected and that’s why one observes a sequential moderation in the May and June GST collections. But a shift to purchase from the formalised economy and behavioural adjustments (especially in the middle- and top-income echelons) in the new normal cannot be disregarded.
The last two are excise collections and customs for which the spending growth numbers have well-defined reasons like elevated taxes, higher crude oil prices and surge in imports.
Stellar revenue collections bode well for the finances of the government and unless there are more lockdowns due to the pandemic, revenue collections will remain buoyant during the year. The worrying aspect, however, is the reasoning around direct taxes which portends to widening inequality with collections driven by smaller portion of the individual and corporate population while the higher indirect collection pinching the pockets of the lower strata (maybe everyone!).
Also, utilising the positive revenue side towards additional spending for the vulnerable section of the population for a more broad-based recovery remains inevitable.