Your income tax payments have boosted govt collections by 53%; how much did companies put in? This is likely to help government to attain target of lower fiscal deficit. However, the internals of tax collection are worrying at the margin. Barring income tax, all the other components of tax are reporting very muted growth in collection
Namrata Mittal
Chief Economist, SBI Mutual Fund
For the first 4 months of FY 2024-25 (i.e., between April and July 2024), the fiscal deficit is tracking much lower than typical trends observed (Table 1). Cumulative fiscal deficit during April and July has declined 54% this year vs. the same time period last year and is merely 17% of full year budgeted deficit (vs. 21 to 34% observed in the last three years). It is due to a combination of stronger receipts (up by 32% y-o-y) and lower expenditure (minus 6% y-o-y) (see Table 2).
#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} The net tax collection in the first four months of FY 2024-25 has been robust at 21 % y-o-y vs. a required growth of 11% to meet the budgeted targets as mentioned in Budget 2024 in July. It is led entirely by a 53% growth in income tax. The growth in all the other tax buckets, such as corporate tax, customs, etc., is short of the budgeted targets. The Table 3 shows non tax revenue is high as it reels under the benefit of a super high dividend transferred by the Reserve Bank of India (RBI) in May 2024. The states have been disbursed a total of Rs. 3.7 trillion under tax devolution, 18% higher than Rs. 3.1 trillion last year, but broadly in line with anticipation.
Table 1: Fiscal deficit is tracking much lower than typical trends observed
Table 2: It is due to a combination of stronger receipts (up 32% y-o-y) and lower expenditure (-6% y-o-y)
Table 3: Income tax collection driving the tax growth
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On the expenditure side, revenue expenditure declined by 2% in the first 4-month period of FY2024-25. Expenditures of the department of fertilizer (primarily subsidy) and transfer to states are running low, as shown in Table 4. The capital expenditure has declined by18% y-o-y. There is a broad based lower capital expenditure by all key ministries such as road, railways, defense, state capex loan expect for the Housing and Urban affairs department as shown in Table 5.
Table 4: Expenditures of department of fertilizer (primarily subsidy) and transfer to states are running low
Table 5: There is a broad based lower spent on all key ministries (road, railways, defense, state capex loan) expect for Housing and Urban affairs dept
The government has tried to efficiently manage its borrowing cost by paring down its short-term borrowings and announcing lesser borrowing via government securities during the first half of FY 2024-25. Yet, the government cash balance has been perennially running to the north of Rs. 2 trillion since May 2024. Small savings collection is estimated to have totaled Rs. 979 billion, which is 29% lower than the same time last year. For the full FY 2024-25, the government estimates the National Small Savings Fund (NSSF) collection to be Rs. 4.24 trillion, which is 3% lower than the last year. However, there are some cushions this year due to a healthy cash balance.
The government expenditure is expected to pick up now that the Lok Sabha election is over. However, we still suspect that the final capex spending in FY 2024-25 could be Rs. 500 billion lower than last year. In Budget 2024, the government allocated Rs. 662 billion towards capital expenditure under new schemes. It remains to be seen if that takes off.
Table 6: Drivers of Income Tax collection
Table 7: What drives the reported income of Taxpayers? Long term capital Gain Tax sees a sharpest growth as asset holders book profit
Source: CGA, Union Budget, SBIFM Research
The internals of tax collection are worrying at the margin. Barring income tax, all the other components of tax are reporting very muted growth in collection: corporate tax 5% y-o-y, GST accrued to Centre 9% y-o-y, excise 1% y-o-y, and custom 4% y-o-y.
As a caveat, we have noticed that corporate tax growth tends to be weak in the initial months of the fiscal and pick-up in subsequent months (corporate tax declined 10% y-o-y during April and July 2023, full year FY24 corporate tax grew 10.3%). All said, income tax reports the strongest tax buoyancy for Central government.
Looking at the reported incomes by individual taxpayers, it appears that stock market gains show the sharpest growth in reported income. The long term capital gains income has grown by 60% CAGR during FY 2020-21 to FY 2023-24 while other incomes such as incomes from salary, house property show a respectable growth. Thus, the government also seems to benefit from rising stock market returns. Hence, if the stock market was to correct, even government tax collection momentum could be dented.
For the FY 2024-25, receipts collection looks on track to keep the overall fiscal deficit under check. There is a high possibility that the capital expenditure can undershoot the budget and fiscal deficit surprises on the positive side once again.
(The article is written by Namrata Mittal, Chief Economist, SBI Mutual Fund.)
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This story originally appeared on: India Times - Author:Faqs of Insurances
