Formulating the Union Budget is a difficult exercise especially on the revenue side as almost every line item is based on the performance of the base on which it is generated. Expenditure is straight forward as there are some that have to be incurred while others are discretionary. The government has the choice to increase or decrease these numbers. The curious fact of the process is that, unlike individuals, who plan expenditure based on income, here, the government fixes expenditure and then judges the income flows and has the buffer of borrowing or using other avenues like disinvestment for balancing the budget.
Tax revenue accounts for around 75% of total receipts of the government. Three taxes—corporate, excise and customs—account for 48-50% of total receipts. The elasticity of each of these taxes has been calculated for the last 5 years, based on Budget data for revenue and growth in imports in rupee terms for customs and GDP from industry in current prices (old series) for excise. For corporate taxes, the profit before tax (PBT) and tax paid has been reckoned for a random set of 2,046 companies.
The elasticity for corporate tax collection has tended downwards, which can be due to both lower profits being earned and concessions being given. Therefore, the elasticity is at 0.6-0.8 in the last 2 years. If the government needs larger revenue from this source, then PBT has to grow at a very robust rate and hence, a prerequisite would be healthy corporate performance. This has to correspond with a high growth in GDP and industry.
The elasticity for customs is very skewed and does not show any trend as such. In FY14, the elasticity looks very buoyant but it is more due to a statistical phenomenon of growth in collections being 5.9% and imports 1.7%. In FY11, both the growth rates were very high at 63% and 23% respectively. But as the accompanying set of tables show, the average customs rate has come down due to the government systematically lowering these rates to enable industry to grow. This would mean that imports have to be even more robust to fetch these revenues as the rates keep moving down.
The picture for excise collections is different with the average rate increasing in the last 2 years. This explains partly the elasticity increasing in FY13 when growth in industry was low. In FY11, both industry and excise collections increased at similar rates.
The conclusion that may be drawn is that the government has to bank on higher growth in corporate profitability, imports and industrial growth to garner higher revenue from these sources. The effective rates of taxation have tended to be stable or low for corporate taxation, marginally lower for customs but increased for excise duties. Therefore, a consideration can be reworking these rates. However, with an informal commitment on retaining corporate taxes at where they are, there is less room for manoeuvrability. But customs and excise would be interesting areas for which their compositions need to be ascertained.
If the total revenue earned has to increase, these major components should contribute to it. Let us look at excise collections first. Crude oil and derivatives are important components and consumption has to increase continuously to keep revenue increasing. This is so as the duty rate is specified in terms of per unit production and not ad valorem. Also, if the price of crude increases, revenue will not go up correspondingly and consumption will be the important factor. Second, for excise duties, tobacco is a major contributor, and this sin tax is critical for maintaining buoyancy as demand tends to be inelastic here.
Increasing rates across the board will not be feasible given an increase in the pace of growth through the infrastructure route will cause the demand for cement, machinery and steel to increase. Hence, the focus will be on buoyancy more than change in rates.
In case of customs, collections would be affected by both the price as well as exchange rate and a higher crude oil price will generate more revenue for say petroleum products as will a weaker rupee. This will mean some challenges on the balance of payments front as well as inflation.
While the GDP growth number is revealed, the certain performance of the economy in different revenue generating areas remains implicit. Non-realisation of the same would mean that there are likely to be slippages along the way. The alternative is to increase rates where possible, but may not be advisable in a situation where the economy is looking for incentives for a boost. Also, with the GST planned for the next financial year, there may be some hesitance in increasing rates across the board this time.
Tax revenue accounts for around 75% of total receipts of the government. Three taxes—corporate, excise and customs—account for 48-50% of total receipts. The elasticity of each of these taxes has been calculated for the last 5 years, based on Budget data for revenue and growth in imports in rupee terms for customs and GDP from industry in current prices (old series) for excise. For corporate taxes, the profit before tax (PBT) and tax paid has been reckoned for a random set of 2,046 companies.
The elasticity for corporate tax collection has tended downwards, which can be due to both lower profits being earned and concessions being given. Therefore, the elasticity is at 0.6-0.8 in the last 2 years. If the government needs larger revenue from this source, then PBT has to grow at a very robust rate and hence, a prerequisite would be healthy corporate performance. This has to correspond with a high growth in GDP and industry.
The picture for excise collections is different with the average rate increasing in the last 2 years. This explains partly the elasticity increasing in FY13 when growth in industry was low. In FY11, both industry and excise collections increased at similar rates.
The conclusion that may be drawn is that the government has to bank on higher growth in corporate profitability, imports and industrial growth to garner higher revenue from these sources. The effective rates of taxation have tended to be stable or low for corporate taxation, marginally lower for customs but increased for excise duties. Therefore, a consideration can be reworking these rates. However, with an informal commitment on retaining corporate taxes at where they are, there is less room for manoeuvrability. But customs and excise would be interesting areas for which their compositions need to be ascertained.
If the total revenue earned has to increase, these major components should contribute to it. Let us look at excise collections first. Crude oil and derivatives are important components and consumption has to increase continuously to keep revenue increasing. This is so as the duty rate is specified in terms of per unit production and not ad valorem. Also, if the price of crude increases, revenue will not go up correspondingly and consumption will be the important factor. Second, for excise duties, tobacco is a major contributor, and this sin tax is critical for maintaining buoyancy as demand tends to be inelastic here.
Increasing rates across the board will not be feasible given an increase in the pace of growth through the infrastructure route will cause the demand for cement, machinery and steel to increase. Hence, the focus will be on buoyancy more than change in rates.
In case of customs, collections would be affected by both the price as well as exchange rate and a higher crude oil price will generate more revenue for say petroleum products as will a weaker rupee. This will mean some challenges on the balance of payments front as well as inflation.
While the GDP growth number is revealed, the certain performance of the economy in different revenue generating areas remains implicit. Non-realisation of the same would mean that there are likely to be slippages along the way. The alternative is to increase rates where possible, but may not be advisable in a situation where the economy is looking for incentives for a boost. Also, with the GST planned for the next financial year, there may be some hesitance in increasing rates across the board this time.
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