Context:

• Widening the tax base and collecting more taxes has been a priority for the current government at the centre. This government’s two major economic disruptions—the introduction of goods and services tax (GST) and demonetisation—were justified in the name of raising tax compliance among other things. However, these moves have not exactly turned out as planned and the government is set to miss its fiscal deficit target for 2018-19.

Facts & Figures:

1. However, even with the wider base, GST collections have been underwhelming. Centre’s total indirect tax collections in the post-GST era show a marked decline. Indirect tax collections (accruing to the centre) in April to September 2018 grew by only 1.8% from a year earlier, much slower than the 5.6% growth seen in 2017-18 full year and even lower than above 20% growth witnessed in the previous two years.
2. While indirect tax collections have lagged, direct tax collections have been robust. Evidently, the demonetisation shock in November 2016 did lead to an increase in income tax collections—both from individuals and firms.
3. However, this increase in tax revenues after demonetisation does not appear to be staggering enough or unprecedented to justify such a large-scale disruption. Part of the increase in direct tax collections in 2016-17, the year of demonetisation, can be attributed to the Income Disclosure Scheme 2016
4. Further, the rate of increase in direct tax collections post demonetisation has not been entirely unprecedented. The 18% growth rate in direct taxes achieved in 2017-18 was similar to the growth seen in 2010-11.

Demonetization:

• Demonetisation disrupted economic activity and hurt growth, especially in areas with high share of informal activity, according to a 2018 World Bank research paper. The paper shows that in districts with more informal activity, local gross domestic product (GDP) fell by 4.7 to 7.3 percentage points in the quarter after demonetisation.
• A recent Reserve Bank of India (RBI) study further suggests that demonetisation caused a “decline in the already decelerating credit growth of the MSME (micro, small and medium enterprises) sector”.
• Despite all these efforts, fiscal deficit for 2018-19 is likely to overshoot the targeted 3.3% of GDP given downbeat GST collections, disinvestment proceeds and limited scope to further tax petroleum products.

What is Fiscal deficit?

• A fiscal deficit occurs when a government’s total expenditures exceed the revenue that it generates, excluding money from borrowings. Deficit differs from debt, which is an accumulation of yearly deficits.
• A fiscal deficit is regarded by some as a positive economic event. For example, economist John Maynard Keynes believed that deficits help countries climb out of economic recession. On the other hand, fiscal conservatives feel that governments should avoid deficits in favor of a balanced budget policy.

Source:Livemint