A careful analysis of numbers shows that much of the growth in tax collections has been because of rate increases rather than increase in activity.
The Finance Ministry on Wednesday claimed that indirect tax collections between April and August rose over 36 percent when compared to the same period a year ago.
While the robust growth may have led some to believe that this was a sign of underlying economic momentum increasing, a careful analysis of numbers shows that much of the growth was because tax rate increases rather than increase in activity.
For instance, while indirect tax revenues grew 36.5 percent in the April-August period, if one were to take out the effect of duty hikes, the growth would be at just over 12 percent.
During the Budget and over the past year, the government has increased excise duty on diesel and petrol (made possible due to the oil price slump), withdrawn exemptions for motor vehicles, increased the clean energy cess and hiked the service tax rate.
The picture is worse on the excise front: when the duty is removed from calculations, the 70 percent year-on-year growth rate falls to merely 9 percent.Through the fuel excise duty hikes, the government earned an additional revenue of Rs 37,000 crore in the first five months of the current fiscal.
This suggests that the government’s claim that there are visible greenshoots in the economy are not reflecting in adjusted tax growth numbers.
When it comes to service tax, the rate hike came into effect on June 1. So it will some time before the impact shows up fully in the numbers. But even without that, the actual service tax collection in April-August grew only 12 percent (if the hike is not accounted for) against 22 percent growth that has been seen.
The government has budgeted to collect over Rs 6.47 lakh crore from indirect taxes in the current fiscal.
But the target is likely to be met given the duty hikes.