Direct Tax and GST collection is also likely to miss targets as well, adding to the pain
It’s like a can of worms. Pushed towards a corner with major industries stalling and plummeting GDP, the Indian Government was left with no choice but to literally pull a rabbit out its hat. And it did, and how.
Corporate tax reduced, minimum alternate tax reduced, relief on buyback tax, and no enhanced surcharge on capital gains.
The Sensex gleed all the way up by a massive 1900 points and all the corporate honchos were happy that Diwali came in earlier. But as is the won't with all post-celebration hangovers, a massive spring-cleaning is required. And the question is whether India can afford that?
Also read: Automobile industry in for double whammy
The biggest question which will stare all squarely in the face is the most likely widening of fiscal deficit by end of March 2020, which is expected to touch 3.8% as against the budgeted 3.3%.
The total revenue loss for the government from the corporate taxes foregone would amount to Rs 1.45 lakh crore. Additionally, the export promotion measures announced would lead to an additional revenue loss of Rs 10,000 crore over the budgeted revenues for 2019-20. The loss in revenue could to an extent be made up using the RBI surplus transfers.
The fiscal deficit could be further pressured in case of shortfalls in tax collections during the year (GST and direct taxes). For the first half of FY20, the direct tax collection was at Rs 5.5 lakh crore out of the budgeted Rs 13.8 lakh crore.
The GST collection has been lower than the targeted Rs 1 lakh crore/month in 2 out of 5 months in this fiscal year. The expansion in the fiscal deficit could be contained if there is any rollover of subsidies (as has been the case in the past) and if the budgeted expenditure has been curtailed/ not incurred. In that case the fiscal deficit could be around 3.6% of the GDP.
The significant measures that the government has been announcing almost once a week, may not all yield the expected results, which can further burn the wounds.
The likely increase in corporate profits could prompt higher foreign inflows into the equity segment. The debt segment on the other hand could see
outflows given the additional government borrowing this move would entail.
Demand conditions are unlikely to see a significant pick up anytime soon as the income and employment scenario continues to be grim.
With the demand scenario unlikely to see significant improvement and the prevailing excess capacity, businesses may not undertake fresh investments.
If one has to glance at the corporate profits data for the first quarter of current fiscal, it nudged up a marginal 6.6% as against a growth of a robust almost 25% during the first quarter of last fiscal. While the cut in corporate tax may boost earnings, the overall economic scenario which is tepid, may not help corporates celebrate as the end of the fiscal may not be on a happy note.
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