{"id":3262,"date":"2015-02-10T22:30:56","date_gmt":"2015-02-10T17:00:56","guid":{"rendered":"https:\/\/teekhapan.wordpress.com\/?p=3262"},"modified":"2015-02-10T22:30:56","modified_gmt":"2015-02-10T17:00:56","slug":"what-jaitley-is-doing-to-meet-the-rs-105000-crore-tax-collection-gap","status":"publish","type":"post","link":"https:\/\/vivekkaul.com\/2015\/02\/10\/what-jaitley-is-doing-to-meet-the-rs-105000-crore-tax-collection-gap\/","title":{"rendered":"What Jaitley is doing to meet the Rs 1,05,000 crore tax collection gap"},"content":{"rendered":"
<\/a>In the Mid Year Economic Analysis released in December 2014 it was estimated that the government will run short of the\u00a0<\/span><\/span><\/span>projected tax revenues by Rs 1,05,084 crore<\/span><\/span><\/span><\/a>. As I have suggested in the past, this means that the government will have to slash its expenditure big time, in order to meet the fiscal deficit target of 4.1% of the GDP that it had set for itself when it presented the budget in July 2014. Exhibit 1:India’s tax-to-GDP ratio remains
\nA\u00a0<\/span><\/span><\/span>deeper reading of a newsreport in The Economic Times<\/span><\/span><\/span><\/a>\u00a0suggests that this will now partly happen on its own. The government expenditure is essentially categorized into two categories-plan and non-plan. Plan expenditure is essentially money that goes towards creation of productive assets through schemes and programmes sponsored by the central government.
\nNon-plan expenditure on the other hand is an outcome of planned expenditure. For example, the government constructs a highway using money categorised as a plan expenditure. But the money that goes towards the maintenance of that highway is non-plan expenditure. Interest payments on debt, pensions, salaries, subsidies and maintenance expenditure are all non-plan expenditure.
\nData released by the Controller General of Accounts(CGA) suggests that during the first nine months of the financial year the period between April and December 2014, the government spent Rs 3,52,631 crore or 61.3% of the Rs 5,75,000 crore plan expenditure that the government had budgeted for.
\nA government rule does not allow it to spend more than 33% of the plan expenditure in one quarter. At the same time the government cannot spend more than 15% of the plan expenditure in March.\u00a0<\/span><\/span><\/span>
\nGiven this, how do the numbers stack up? 33% of Rs 5,75,000 crore, the budgeted plan expenditure for the year, amounts to Rs 1,89,750 crore. The government has already spent Rs 3,52,631 crore between April and December 2014. Hence, for the current financial year as a whole, it cannot spend more than Rs 5,42,381 crore (Rs 3,52,631 crore plus Rs 1,89,750 crore).
\nThis means that the government will automatically end up not spending Rs 32,619 crore. In fact, the 33%\/15% rule applies at the ministry, department as well as scheme level. Given this, the actual number can be slightly different from the overall number arrived at.
\nWhat this means is that the government will have to further slash plan expenditure in order to meet the tax gap of Rs 1,05,084 crore. This shouldn’t come as a surprise given that in the last two financial years, this is exactly what the government did.
\nThe plan expenditure target of the government during the last financial year was at Rs 5,55,322 crore. The actual plan expenditure came in at Rs 4,75,532 crore, which was close to Rs 80,000 crore or 14.4% lower. This is how the fiscal deficit of 4.6% of GDP was achieved.
\nA similar strategy was followed in 2012-2013 as well. In 2012-2013, Rs 5,21,025 crore was budgeted towards plan expenditure. The final expenditure came in 20.6% lower at Rs 4,13,625 crore.
\n<\/span><\/span>The Economic Times suggests<\/i><\/span><\/span>\u00a0that the plan expenditure this time around will be Rs 80,000 crore lower. The paper goes on to suggest that this will be\u00a0<\/span><\/span>Santa’s<\/i><\/span><\/span>\u00a0late gift to finance minister Arun Jaitley.
\nThis can hardly be the case given that plan expenditure is asset creating. In an environment where private investment continues to remain slow, if the government expenditure is also cut dramatically, it can’t be good for the economy. But given that the government’s revenue projections have gone dramatically wrong there is nothing much it can do other than slashing plan expenditure, given that non plan expenditure cannot be easily slashed.
\nThe bigger problem here remains that India’s tax collections are very low in comparison to its gross domestic product. Analysts Ritika Mankar Mukherjee and Sumit Shekhar of Ambit Capital in a recent report titled\u00a0<\/span><\/span>Modi’s ambitions will reshape India’s fiscal construct<\/i><\/span><\/span>\u00a0show that India’s tax collections are abysmally low as a proportion of its GDP. The next exhibit shows that clearly.\u00a0<\/span><\/span><\/p>\n
\nabysmally low at 11% as per FY15 Budget Estimates<\/b><\/span><\/span><\/span><\/p>\n