Forget tax cuts, Sitharaman advised against Budget sops

FinMin does not expect tax or non-tax revenue to reach anywhere close to the targets set in the interim Budget.
Sources say that the challenge before the new government will be either to accept the reduced projection and tailor the Budget accordingly or set a more ambitious target.

Government officials have advised Finance Minister Nirmala Sitharaman that there is no fiscal space for any giveaways in the forthcoming Budget.

This was the grim verdict of each presentation made by the departments of the finance ministry in marathon meetings that extended till late in the evening on Saturday.

The ministry does not expect tax or non-tax revenue to reach anywhere close to the targets set in the interim Budget.

The corporate tax receipts for 2019-20 (FY20) are expected to rise by 15 per cent and personal income-tax by an even more ambitious 32 per cent.

As for the Goods and Services Tax (GST) collections, these are projected to rise by 18 per cent, according to the Budget.

If the government wants to stick to the same numbers even now, there is no scope for offering any tax sops except those that are already pencilled in.

This poses a challenge to the new National Democratic Alliance government which would like to reward some of its constituencies, particularly the salaried class, in the first Budget of its second innings.

Saturday’s meetings, the first Sitharaman had with her ministry officials, had a sense of urgency as the date for the Budget has been set for July 5, which is just a month away.

The finance minister, flanked by her  Minister of State, Anurag Thakur, sat through the day-long presentations made by five departments of the finance ministry - revenue, expenditure, investment and public asset management, economic affairs, and financial services.

The pointers from the discussions will now be taken across the street to the Prime Minister’s Office (PMO).

Since Arun Jaitley is no longer the finance minister, North Block mandarins expect to firm up the crucial fiscal deficit numbers only after the PMO gives its directions.

All the departments of the finance ministry agreed with the Reserve Bank of India projection that gross domestic product growth rate for FY20 will be about 7.2 per cent, instead of 7.4 per cent as expected earlier.

Sources say that the challenge before the new government will be either to accept the reduced projection and tailor the Budget accordingly or set a more ambitious target.

But this could raise the government’s aggregate borrowing from the market, and most officials have weighed in against that.

The austere outlook comes days before the finance minister sits down with the state finance ministers in the GST Council, where there are pending proposals for rate rationalisation in industries like cement.

Currently, the rate is at 28 per cent, but if it is slashed to 18 per cent to reduce costs for the manufacturing and construction sectors, the government’s purse will be poorer by Rs 13,000 crore.

The finance ministry feels that no further changes in the rates should be made at this stage as the collections from GST are still underperforming.

The data released on Saturday shows GST receipts for May 2019 was just above Rs 1 trillion (Rs 100,289 crore).

While this is the third consecutive month when the number has crossed a trillion, it is well short of the interim Budget projections of about Rs 1.14 trillion per month.

The additional concern at this stage is the N K Singh-headed 15th Finance Commission’s award for the sharing of tax revenue with the states.

The 14th Finance Commission had earmarked 42 per cent of the total tax revenue of the Centre for the states.

Government officials feel that thanks to the GST sharing formula, the states are already clawing away a larger percentage of taxes.

Hence, any additional support will make the Centre’s share precarious.

The Commission members are expected to meet Sitharaman next week.

In this context, officials have advised the minister that any tax sops or other relief at this stage will make the Budget exercise complicated.

In the first meeting of the Union Cabinet, the government has universalised the income support for farmers at an additional cost of Rs 13,000 crore above the Rs 75,000-crore projected earlier.

The government has also inked a pension plan for farmers and traders on a cost-sharing basis, but the Cabinet papers give no indication of the likely cost to the exchequer on account of it.

Photograph: Kham/Reuters