The government is too dependent on corporates for tax collection which is why taxes also go up or down depending on corporate profitability . This in turn is detrimental to how the government manages its deficit numbers.
Government policies do not affect the revenue side of the deficit whereas it is corporate profit numbers that become crucial. Atsi Sheth of Moody’s Investors Service told CNBC TV18 that the problem got even bigger when slow GDP growth automatically resulted in lower taxes, aggravating the deficit problem.
Next year, however, is going to be better, said Seth as GDP forecast is at 7.6 percent for the government and 7.3 percent with Moody’s as well. But the point is not about one year or a couple of years. So much dependence on corporate taxes hurts because every time GDP slows, deficit figures shoot up. A longer term solution is to diversify tax base, an attempt made with the goods and services tax (GST).
Sethi, however, says the service tax rise and effect of the negative list will at least take five to seven years to show up in the tax to GDP ratio.
Sethi is fairly confident that inflation numbers will come down. Given the high base last year, it is difficult to have higher inflation. But the forecast for fiscal deficit is high at 5.5 percent against the 5.1 percent number the government has put out. Unless the fiscal numbers are corrected also through expenditure management, inflationary pressures will continue on the economy.