Tax Relief given by Government during Pandemic & its implications on Macroeconomics of India

Tax Relief given by the Government during the Pandemic and its implications on the Macroeconomics of India.

(5^th Year Law Student at Hidayatullah National Law University)

Introduction – This article briefly talks about the Macroeconomic reasons which are closely aligned and in sync with fiscal policy & taxation regimes and its after-effects. A detailed explanation which is placed on record to show that the tax reliefs given by the government, has only led to a fiscal and economic collapse which the Nation and its citizens can’t ill afford to face at this juncture.

In response to the spread of Novel Corona Virus (COVID-19) in several nations around the world, including India, the government issued numerous announcements providing different financial assistance to the tax payers. These mostly concerns, conditional interest rate reductions for late payments and conditional waivers of late fees for late filing returns. For instance, the Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020; an ordinance to provide relaxations in the provisions of certain Acts. Through the said Ordinance, a new section 168A was inserted to the Central Goods and Services Tax Act, 2017.

Macroeconomics during 1^st wave – The economic impact of the lockdown was clearly evident in the trends in GDP growth. The April-June 2020-21 quarter experienced a contraction of 24.4 percent in output on year-on-year basis. Unlocking of the economic activities began in June 2020, however the impact of containment measures was evident with decline in output during Q2 of 2020-21 by 7.3 percent, less severe than first quarter. Overall movement of high frequency indicators over Q1, Q2 and Q3 indicated revival in Q2 and growing convergence to pre-pandemic levels in Q3.[1] For the whole year, 2020-21, the economy is expected to contract by 8.0 percent as compared to a growth of 4.0 percent in 2019-20.[2] This reflects the unparalleled effect of the Covid-19 pandemic and the containment measures that were taken to control the pandemic. The contraction was consistent with the India’s enforcement of one of the most stringent lockdowns as reflected in the Government Response Stringency Index measured by Oxford University. This is the fourth contraction in India’s GDP since 1960-61. A significant drop in agricultural productivity was a consistent theme throughout these years. On the other hand, the year 2020-21 has been blessed with copious monsoons, resulting in the agricultural sector appearing as the economy’s silver lining. The contraction this year reflects the pandemic’s “once in a century disaster” and related public health interventions.[3]

Growth of high frequency indicators representing industry output such as index of industrial production, index of core industries remained in negative territory for a period of six consecutive months during March – August 2020. Moreover, other indicators like growth in power demand, volume of E way bill, PMI (Purchasers Manufacturing Index) Manufacturing shrank during the period delineating the catastrophic impact. During FY 2020-21, the index of industrial production has de-grown by 8.6 per cent compared with negative growth of 0.8 per cent in FY 2019-20. Industrial output in first half of the year fell by 20.7 percent while in the second half the growth has been at a slow pace of 3.9 per cent. In the first half of this fiscal year, all components of the sectorial and use-based classifications saw a drop in output, weighted down by a strong slowdown. With the progressive unlocking and support of fiscal/monetary policies, the economy saw a robust rebound in the second half of 2020-21.[4] The service industry, which account for the majority of GVA, is expected to fall by 8.1 percent this year. Trade, hotels, transportation, and communication are expected to decrease by 18.0% in the Services Sector. Real GVA in Services has recovered from a 21.4 % contraction in Q1 to a minimal 1.0 % decline in Q3 of 2020-21. The much lower contraction of GVA in Services sector is welcome as activity levels in contact- based services appears to have risen with the decline in the pandemic curve. A continuous decline in the pandemic curve and a step-up in vaccination drive, as recently announced will support further revival of contact-based services.[5]

Macroeconomics during 2^nd wave – Despite the surge in cases, the recovery in economy is resilient with sustained improvement in majority of high frequency indicators. The localized lockdown appears to have no significant impact on the indicators. In April, due to the second wave in India, the momentum in economic recovery since the first wave has moderated. Agriculture remains the silver lining, with record food grain output expected in the next crop year thanks to regular monsoons. Tractor sales, for example, increased by 172% and 36% respectively from a low base in March 2020 and the pre-COVID month of March 2019.[6] In March 2021, the index of industrial output and the index of key industries both increased by 22.4 percent and 6.8 percent, respectively, demonstrating recovery from the low bases of the previous year’s comparable months. India’s electricity usage increased by 40% in April 2021 compared to April 2020 and 6.5 percent in April 2019, indicating continued industrial and commercial activity.[7]

Therefore, the macroeconomic picture of India during the lockdown in Covid-19 first wave last year and Covid-19 second wave this year and the distinction is well apparent and significant in view of the continuity in the economic and industrial services and the revenue generation leading to the sustained recovery of the economy which otherwise plunged into great difficulties last year.

Analysis of the Tax Reliefs given by the Government – Central GST receipts in FY 2020-21 are 106 percent of RE, although being 8% lower than the previous year. Due to the economic recovery, GST receipts increased significantly in the second half of FY 2020-21, surpassing 1 lakh crore in each of the past six months. GST collections registered another record high of ₹ 1.41 lakh crore in April, indicative of continual economic recovery. Union Budget 2021-22 has envisaged an enhancement in capital expenditure – which should be frontloaded to support economic activity to sustain the recovery. This would need Government to have a smooth flow of funds throughout the year. Therefore, the deadlines should not have been extended given that economy is recovering and Government needs revenue for sustaining the support to the economy. A cumulative analysis of the above submission and data would throw light into the following:

– Economic growth, recovery or sustenance have a direct impact on the Revenues a Nation may require for the various welfare activities that the Nation undertakes for the benefit of the vulnerable sections. For this purpose, the two large and broad Revenue streams are the GST and Income tax payments/collections. Therefore, the macroeconomic scenario and its consequential impact on taxation remain as two sides of the same coin.

– Physical health and economic health are a pair of eyes which needs to be guarded and protected by the Nation. They need to go hand in hand as one without the other would become dysfunctional leading to a collapse. In view of the experience gained over the last 15 months in striking a balance between the two, the various States which had announced partial lockdowns/ night curfews etc., have ensured physical health and life which is of paramount importance is protected with a localized containment and spread of the infection getting stopped through a chain of processes aligned to this containment. The respective States while imposing the restrictions and conditions are cognizant of the fact that the economy or the economic/ industrial/ service activities should not get stopped as the Nation and the states have to live with the reality. Consequently, the curbs or the clamp downs imposed last year have not been done during the Covid-19 second wave this year.

– The empirical data placed on record show that the economy is on the revival path since second half of 2020 and is surging forward.

It is for this reason that when batches of matters were filed before the Hon’ble Supreme Court seeking extension of moratorium period, large scale relief packages, extension of deadlines etc., the Hon’ble Supreme Court vide its decision dated 23.03.2021 had rejected the same reiterating the restraint Courts have imposed on themselves in entering into this domain. Growth of the economy should not be compromised and any interference which would impede the same, needs to be declined as the repercussions become unbearable. The empirical data produced above vividly bring out the negative growth due to clamp downs last year, indicated in percentages and the revival of it is progressively moving towards catching up with what had been lost.

Taking this into consideration, States have allowed economic activities to continue to happen in the second wave as it impacts every aspect of the economy. A clear distinction needs to be made between the economic uncertainty that was created by the first wave vis-à-vis the same created by the second wave. When the first wave of the pandemic hit India and the other nations, several “unknown unknowns” created enormous uncertainty. In contrast, with the experience gained both by the countries and firms over the last fifteen months, the uncertainty from the second wave is one of “known unknowns” as against “unknown unknowns.” This crucial distinction has led to countries and states employing less intensive restrictions on economic activities. As a result, the economic impact of the second wave is expected to be much more muted than the first wave. Therefore, the waivers given in the recent GST council meeting dated 29.05.2021, following the second wave are inconsistent with economic logic.

The reasons for this are simple. When there is economic activity generating income, it is the duty to remit corresponding taxes. Even in the Covid-19 first wave, when a batch of Petitioners approached the Hon’ble Supreme Court to extend timelines on banking matters, again dealing with fiscal or monetary issues, the Hon’ble Supreme Court declined to interfere. The situation here is far better and is improving day by day. Those who perform economic activities should be allowed to pay taxes and those who do not perform so, there is no compulsion by law to make them pay. Now, to say that there is a constraint in the case of few, the rest should also not pay will be a disaster. A relief to one at the cost and expense of a larger community is not granted based on the well settled principle as approved and relied by the Constitutional Bench of the Hon’ble Supreme Court in Justice K.S Puttaswamy and Ors v. Union of India & Ors (Aadhar 5 Judges Case), 2019 1 SCC 1, wherein it was held that, whenever there is a conflict between individual rights vis-á-vis communitarian rights, the former has to yield to the latter since the benefit of the larger community will have an overbearing effect.

The observations of OECD, an article on Vicious Cycle of Regulatory Forbearance.,[8] “As the pandemic eventually recedes, higher government spending to boost health care, economy and society in the aftermath of COVID-19 will not be sustainable without adequate fiscal revenues. The need to balance economic stimulus with mobilizing fiscal revenues bring into sharp relief the importance of tax administration and tax policy in Asia and the Pacific. In addition, measures adopted by tax administrations to facilitate ease-of-tax compliance by allowing deferment of tax payments, extending deadlines of filing tax revenues, tax holidays etc. may delay in realization of revenue.” According to the Union Budget 2021-22, the revised estimate of fiscal deficit of the Union government is Rs. 18.5 lakh crore (or 9.5% of GDP) in 2020-21. In addition, states have incurred an additional deficit. Together, this is likely to be Rs. 25.5 lakh crore (or 13.5% of GDP) (Rao 2021a). Total outstanding liabilities is expected to be close to 90 per cent of GDP in 2020-21 (Rao 2021a). In fact, according to Rao (2021b), the pandemic has made the Fiscal Responsibility and Budget Management (FRBM) act completely irrelevant and hence there is a need for a new fiscal consolidation roadmap amidst the COVID-19 pandemic.

Conclusion – Therefore, the findings are relevant in the present circumstance when many regulators have resorted to different types of forbearance in response to the Covid-19 induced economic crisis. Thus, the government should take significant caution before the exercise of regulatory forbearance, especially when political economy factors are at play.

[1] Mospi.gov.in. n.d. [online] Available at: <https://mospi.gov.in/documents/213904/416359//PRESS%20NOTE%20SAE%2026-02-20211614341126263.pdf/c0c19d9d-1fdd-f0ae-02f1-e2d23875ac60> [Accessed 6 June 2021].

[2] Ibid.

[3] Economic Survey, 2020-21, Ch 1, Volume II.

[4] Mospi.nic.in. n.d. IIP | Ministry of Statistics and Program Implementation | Government Of India. [online] Available at: <http://mospi.nic.in/iip> [Accessed 6 June 2021].

[5] Mospi.gov.in. n.d. [online] Available at: <https://mospi.gov.in/documents/213904/416359//PRESS%20NOTE%20SAE%2026-02-20211614341126263.pdf/c0c19d9d-1fdd-f0ae-02f1-e2d23875ac60> [Accessed 6 June 2021].

[6] Dea.gov.in. n.d. [online] Available at: <https://dea.gov.in/sites/default/files/MER%20April%202021_0.pdf> [Accessed 6 June 2021].

[7] Ibid.

[8] (May 2021) by Nitin Mannil, Naman Nishesh and Prasanna Thanthri and Public Finance Managmenet in India in the time of COVID-19 Pandemic (18.05.2021) by Sacchidanandha Mukherjee and Shivani Badola.