MUMBAI: India’s corporate and income tax collection for the current year is likely to fall for the first time in at least two decades, several senior tax officials told Reuters, amid a sharp fall in economic growth and cut in corporate tax rates.

"This will be the first time that we’ll see a fall in direct tax collection ever,” said a tax official in New Delhi.

Prime Minister Narendra Modi’s government was targeting direct tax collection of 13.5 trillion rupees ($189 billion) for the year ending March 31 — a 17 per cent increase over the prior fiscal year.

But a sharp decline in demand has stung businesses, forcing companies to cut investment and jobs, denting tax collections and prompting the government to forecast 5pc growth for this fiscal year - the slowest in 11 years.

The tax department had managed to collect only 7.3 trillion rupees as of Jan 23, more than 5.5pc below the amount collected by the same point last year, said a senior tax official.

After collecting taxes from companies in advance for the first three quarters, officials typically garner about 30-35pc of annual direct taxes in the final three months, data from the past three years shows.

But eight senior tax officials interviewed by Reuters said despite their best efforts, direct tax collections this financial year were likely to fall below the 11.5tr rupees collected in 2018-19.

He estimates that direct tax collections for this year could end up roughly 10pc below fiscal 2019.

The finance ministry did not immediately respond to requests for comment.

Direct taxes typically account for about 80pc of the government’s projections for annual revenue, and the shortfall may leave the government needing to boost borrowing to meet expenditure commitments.

The tax officials also say that a surprise cut in the headline corporate tax rate last year aimed at wooing manufacturers and boosting investment in Asia’s third-biggest economy is another reason behind the sluggish tax collections.

“We’ll be very happy if we can even break even with what we collected last year,” said another senior tax official in the financial capital, Mumbai, the biggest tax generator, accounting for about a third of revenues from direct taxes.

“But given the state of the economy, I’m not too hopeful.”

The concerns are exacerbated by a gaping shortfall in the goods and services tax (GST) that is expected to further hurt total collections.

The total tax collection shortfall for the current fiscal year could be about 3 trillion rupees - the highest shortfall ever recorded.

“With revenue sources stretched, we’re not assuming any rise in the capex bill in FY21,” Pranjul Bhandari, chief economist at HSBC in India, said in a note, adding she expects the government to resort to higher borrowing from the market.

Published in Dawn, January 28th, 2020