Modi govt in tight spot as economy continues to falter, revenue drops

New Delhi, Dec 17 : With Centre missing the deadlines to release compensation to states, it is a no brainer that its coffers are in extremely bad shape.

But what worries the experts more is paucity of choice before the government in the wake of a dwindling economy.

While policy experts see printing more notes, raising tax rates and levying the compensation cess on more items, their sides effects could weigh heavy on the economy.

A former Finance Secretary said that the government can breach its fiscal target for FY20 but that will send a very wrong signal to both domestic and foreign investors.

He noted that the Centre's fiscal deficit had already exceeded the Budget estimate in the first seven months (April-October) of the fiscal.

"Even on the disinvestment front, money is not going to come immediately.

Basically, it will go hand-to-mouth. Either, the government will have to print notes or raise taxes which will be collected from the people.

Given the state of the economy, cutting down on government spending is not a choice," he said.

Besides GST collection target slipping by a wide margin, the situation on direct tax front is also not encouraging.

As against the target of Rs 13.5 lakh crore in direct taxes during FY20, the government could mop up only Rs 6 lakh crore or less than 50 per cent till about mid-November.

With the Budget just a few weeks away and revenue growth remaining subdued, the government is perhaps facing the most challenging situation.

In what shows its desperation, the Finance Ministry has asked tax officers to ensure Rs 1.10 lakh crore is collected in GST in the remaining period of the fiscal while exhorting them to also meet direct tax collection target.

The government has taken Rs 1.76 lakh crore from the Reserve Bank of India (RBI) drawing criticism from opposition parties and some of the leading economists.

Some of the opposition-ruled states attacked the Central government from all sides recently for not releasing the GST compensation dues since August.

Even in the Parliament, Finance Minister Nirmala Sitharaman had to face several questions with many members asking for clear deadline for payment.

While the Minister ducked on a cut-off date for release of compensation, the Central Board of Indirect Taxes and Customs (CBIC) on Monday announced that the compensation dues for the months of August and September had been transferred to states.

"The Central Government has released GST compensation of Rs 35,298 crores to states and Union Territories today," the CBIC said in a Twitter post.

The compensation dues for the month of October and November are yet to be cleared.

With both GST and compensation collection remaining low in the wake of a sluggish economy, the Centre has to find ways to make up for the revenue loss of states given that it is committed to do so as per the law.

Most tax experts expect the Centre to propose a GST rate hike, increase in compensation cess or bringing more items under compensation cess as the all-powerful GST Council meets on Wednesday.

"The revenue collection has not been up to the target, both on the normal GST front and compensation front so, the Central government is short of the revenue required.

With other measures being taken by the Centre such as lowering of corporate tax rate, there is pressure on the government," said Bipin Sapra, partner at global consultancy EY.

"To be able to transfer the compensation to states ontime, the government will have to further boost their revenues in some ways," he added.

But given that consumption has fallen drastically contributing to decline in GDP to 4.5 per cent in July-September quarter of FY20, raising tax on the common man may not be a good idea.

(Nirbhay Kumar can be contacted at



Source: IANS