Gross Tax Revenues To Surpass FY2022 Budget Estimates: ICRA

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ICRA

Q1 FY2022 inflows stood at 25% of the FY2022 BE of Rs. 22.2 trillion

Inflows in Q1 FY2022 nearly 40% higher than pre-Covid level

ICRA highlighted that the gross tax revenue inflows of the Government of India (GoI) in Q1 FY2022, had already reached a quarter of the Budget Estimates (BE) for the full year, despite the impact of the second wave of Covid-19 on economic activity. Encouragingly, the tax inflows of the GoI in Q1 FY2022, were nearly 40% higher than the pre-Covid level of Q1 FY2020. Based on this, the rating agency projected that the gross tax revenues of the GoI would surpass the FY2022 BE, led by indirect taxes.

According to Ms. Aditi Nayar, Chief Economist, ICRA Ltd: “While corporation tax, personal income tax and CGST receipts in Q1 FY2022 stood at 21-22% of their FY2022 BE, union excise duty and customs duty collections had already crossed a considerable 30% of the respective budgeted targets, benefitting from the cesses imposed on fuels as well as a relatively faster recovery in international trade, respectively.”

Additionally, GST compensation cess inflows had aggregated to Rs. 246 billion in Q1 FY2022, nearly 25% of the FY2022 BE. This suggests that the full year collections may exceed the FY2022 BE of Rs. 1 trillion, which will ease concerns regarding the flows of GST compensation to the state governments through the grants route.

“Our calculations suggest that the FY2022 BE for gross tax revenues of Rs. 22.2 trillion can be achieved, even with a 5% contraction in the remainder of FY2022, which appears unlikely despite the lingering uncertainty on the growth front. In absolute terms, even if the gross tax inflows in the last three quarters of FY2022 fall short of the level collected in July-March FY2021 by a considerable Rs. 950 billion, the budgetary target for FY2022 will not be missed,” added Ms. Nayar.

“The healthy tax inflows in Q1 FY2022 suggest that there is some space to reduce the cesses on petrol and diesel, which will both boost consumption sentiment and ease inflationary pressures. This would allow monetary policy normalisation to be postponed, in a bid to continue to support economic activity in an uncertain growth environment,” Ms. Nayar said.

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The data on the GoI’s tax collections for Q1 FY2022 was made available in an un-starred question of the Lok Sabha dated July 19, 2021. Based on this, the major tax revenue streams of the GoI aggregated to around Rs. 5.6 trillion in Q1 FY2022, which is 25.1% of the FY2022 BE for gross tax revenues of Rs. 22.2 trillion. This is meaningful, as the size of the tax base typically tends to be proportionately muted in the first quarter of each fiscal, ICRA highlighted.

The tax inflows of the GoI of Rs. 5.6 trillion in April-June 2021, were a sharp ~107% higher than the provisional receipts of Rs. 2.7 trillion in Q1 FY2021, which largely reflects the low base of the nation-wide lockdown. More meaningfully, the tax inflows expanded by 39% in Q1 FY2022, relative to the gross receipts of Rs. 4.0 trillion recorded in Q1 FY2020, i.e. the pre-Covid level,” added Ms. Nayar.

With an upside surprise in the GoI’s gross tax revenues in FY2021, the FY2022 BE of Rs. 22.2 trillion is a modest 9.5% higher than the provisional collections of Rs. 20.2 trillion in the previous year. This embedded growth of 9.5% is substantially smaller than ICRA’s estimates of nominal GDP growth of 15-16% in FY2022.

EXHIBIT: GoI’s Gross Tax Revenues in Q1 of FY2020, FY2021 and FY2022

*Estimates are calculated as per the answer provided in Lok Sabha by the Ministry of State in the Ministry of Finance; Source: CGA; ICRA research

EXHIBIT:  Growth in Gross Tax Revenues of the GoI in Q1 FY2022 over Q1 FY2021 and pre-Covid level of Q1 FY2020

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*Estimates for Q1 FY2022 are calculated as per the answer provided in Lok Sabha by the Ministry of State in the Ministry of Finance; Source: CGA; ICRA research

EXHIBIT:  Collections of Direct and Indirect Taxes by the GoI in Q1 FY2022* and % of FY2022 BE raised up to Q1 FY2022

*As per the answer provided in Lok Sabha by the Ministry of State in the Ministry of Finance; CGST: Central Goods and Services Tax, IGST: Integrated Goods and Services Tax; Amount for IGST collections included in FY2022 BE is nil; Source: CGA; ICRA research