Tying up loose ends

The massive financial engineering to mop up revenue collection to cover the large direct tax shortfall in the revised budget estimate for 2018-19 throws up a new challenge for the next government. The new government may find its coffer substantially dry, forcing it to go for large borrowing. Such a situation will also impact the next government's budget preparation, especially on the development expenditure side. The finances of large profit-making public sector enterprises, which have been used as a cash cow to fund budget deficits, are bound to be weakened hurting their capital expenditure programmes.

The government has almost recklessly used a good number of PSEs to fund its budget deficits. On the other hand, the revenue officials dialled banks asking them to deposit tax deducted for March before the very end of the month. Normally, this is paid to the government only in April. Tax authorities made all efforts to ensure that at least the original budget estimate for 2018-19 is achieved. In fact, the revenue department officials managed to garner nearly Rs 1,00,000 crore in just last three days of 2018-19. Yet, the direct tax collection shortfall for the year may be around Rs 60,000 crore or more. The department of expenditure asked ministries to hold back development spending and projects.

The PSEs became the worst victim of the government's highly controversial budget engineering exercise. Several of them were asked to pay interim dividends for the second time before the end of the year. Some entities like Coal India, ONGC and IOC obliged and already paid interim dividends. During the year, the government collected over Rs 60,000 crore from public sector disinvestment, mostly by forcing PSEs to use their reserves to buy government stakes. In Budget 2018, it was announced that 2017-18 disinvestment target of Rs 72,500 crore was exceeded. The government expected that the disinvestment receipts in 2018-19 could reach Rs 1,00,000 crore, although the target for the last financial year was set at Rs 80,000 crore.

Significantly, PSEs were made to buy into each other to lift the government's stake offers as there was little response to such sale bids from the market. As a result, the PSEs will have little choice but to restrict their projected capital expenditure in the current financial year, indirectly impacting the country's industrial growth during 2019-20. The government appeared to be more concerned about containing the budget deficit than the future well-being of the vital public sector that supports almost 35 per cent of the country's industrial growth.

The first month of 2019 saw growth in the eight core sectors of the economy, led largely by PSEs, crash to a 19-month low at 1.8 per cent, slipping below the 2.8 per cent growth in December. The core sector's growth went down for the third straight month in January, as the two largest contributing sectors — electricity and refinery products — remained in the negative zone. The aggressive direct tax collection drive to cover the 2018-19 budget deficit — in the absence of its ability to manoeuvre the indirect tax collection system, primarily due to GST — has upset all concerned.

In fact, chartered accountants across the country went to the extent of approaching the Prime Minister's Office (PMO) and the finance ministry to rein in tax officials who have been directed to take "all possible actions" to recover tax amid a shortfall in revenue collection. On March 26, the Central Board of Direct Taxes (CBDT) issued instructions to all principal chief income tax commissioners across the country to take "all possible action" immediately to boost the collection of direct taxes, including recovery of arrears. This caused a great deal of concern in the minds of taxpayers as it is bound to create unrealistic pressure on tax officers, particularly days before the end of the financial year, pointed out an unusual press statement jointly issued by the Bombay Chartered Accountants' Society, Chartered Accountants Association Ahmedabad, Chartered Accountants Association Surat, Karnataka State Chartered Accountants' Association and Lucknow Chartered Accountants' Society.

Interestingly, many of the members of these organisations are strong supporters of BJP and the prime minister. One of them is an influential member of the Union Cabinet. "Such a situation would be in sharp contrast to the stated motto of the government of ushering in a tax-friendly regime," said the communiqué signed by Sunil Gabhawalla (Mumbai), Chintan M Doshi (Ahmedabad), Rashesh Shah (Surat), Raghavendra Shetty (Karnataka) and R L Bajpai (Lucknow).

In a large number of cases the demands are disputed in appeal and the taxpayers concerned have a high chance of succeeding in the appeals, said the associations that appealed to the PMO and finance ministry to instruct CBDT and ground level I-T department officers to refrain from taking actions which are not in the interest of the tax-paying community. The associations argued that "if at all recovery measures are to be adopted, they should be done after following the due process of law".

The revenue department might have had its own reason to make such desperate year-end attempts to put its house in order. At the end of February 2019, the government's fiscal deficit was 34.20 per cent more than the revised estimates, highlighting the challenge revenue department faced in meeting the target for the financial year as tax collections remained muted. The fiscal deficit target for FY19 was revised upwards to 3.4 per cent of GDP in the interim budget for FY20 presented on February 1 from 3.3 per cent estimated initially. The budget deficit is normally covered by borrowing from the Reserve Bank. The 2018-19 fiscal deficit, despite the aggressive year-end direct tax and dividend collection measures, will bring heavy pressure on the new government which may find its coffers substantially dry at the end of the April-June quarter of the current financial year. 

(The views expressed are strictly personal)