It is strange that the day one of
India’s leading financial newspaper chooses to print a bearish front page
warning of the “Storm of Worries” that lie ahead in its growth trajectory based
on qualitative responses, a very bullish (and almost real-time) data point gets
hidden and lost in the same publication’s Page 12.
Indirect tax revenue collections
rose 46.2% in April Y-o-Y, from Rs. 32,661 crore to Rs. 47,747 crore.
Table 1: Indirect Tax Revenue Collections in April 2015 by segment
|
Indirect
Tax Component
|
% increase
Y-o-Y
|
Nominal
Value
|
|
Customs Collections
|
23.6%
|
Rs. 14,286 crores
|
|
Service Tax Collections
|
21.2%
|
Rs. 15,088 crores
|
|
Central Excise Collections
|
112.3%
|
Rs. 18,373 crores
|
Increase in the collections of
indirect tax revenues speaks to the strength of the consumption power in the
country. Customs collections speak to the strength in imports whereas both
service tax revenue and central excise tax revenue speak to the domestic
consumption of services and goods. The potential of the Indian consumer is
highlighted in this data release especially given the magnitude of the increase
and the fact that it occurred in April. Historically, April has seen weak
collection numbers owing to higher tax payments made in the month of March
resulting in refunds being issued in April.
A portion of the increase in
service tax revenue collections can be attributed to the increase in the tax
rate from 12.36% to 14% in the budget for FY16. However the tax rate has
increased by 13% whereas the service tax revenue collections are up 21.2%.
The staggering jump in central
excise collections is especially surprising given that these numbers were
announced following data on retail inflation being released. Retail inflation
in India eased to 4.87% in April, the lowest it has been this year. Both this
and the consumer food price inflation numbers came in below analysts’ predictions.
Consumer food inflation slowed to 5.11% in April from 6.14% the month before. Last
April retail inflation and consumer food inflation came in at 8.38% and 9.21%
respectively. Therefore the pickup we see in this year’s collections is not a
result of price increases. There will definitely be an element of consumers
using more cards in transaction or asking for a receipt of their purchase
diminishing the consumption with unaccounted for cash (which cannot be taxed by
the government). However that cannot be the only factor contributing to the
magnitude of this increase.
The government has been able to
generate such a growth in tax revenues despite having VAT and other indirect
tax rates be lower than other major economies in the world. Only Switzerland
and most states in the US have a tax rate lower than India’s.
Table 2: VAT Rates around the World
*USA does not prescribe tax rate at a federal level but at an
individual state level.
Source: IBFD Tax Research Platform
With the publication prophesizing
the storm and HSBC downgrading India to underweight, this crucial data point
maybe overlooked or be considered the peak before the fall. However the
marginal propensity to consume is lower in India than in other major economies
and consumption still accounts for a lower percentage of the GDP (approx. 55%)
versus the 70% witnessed in the US or the UK. With rising incomes as well as
rising propensity to consume, indirect tax revenues will also continue to rise.
This is one of the better ways to
track the strength of the consumer in India and would remain a key metric going
forward.
