The myth of foregone revenue
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The issue of tax revenues foregone by the Union government has been raised repeatedly by eminent persons such as Amartya Sen and S. Gurumurthy and politicians such as Sitaram Yechury. It has become fashionable to raise this issue to castigate the government of the day for handing over vast sums of money to the private sector as tax concessions. Although official data makes it amply clear that the total amount of revenue foregone is made up of a variety of concessions vested interests, either mistakenly or dishonestly, cite the entire amount running into trillions of rupees as tax sops.
Facts belie these assertions. Total revenues foregone have declined over the years as a percentage of gross domestic product (GDP) (see table). More importantly, official data makes it clear that these estimates include several fiscal incentives that cannot be classed as giveaways. In our understanding, these should not be included in estimates of revenues forgone.
Some examples are in order here. Section 5A (1) of the Central Excise Act, 1944, empowers the Union government to lower tariff rates below levels prescribed in the schedules. These lower excise rates are applicable to mass-consumption goods such as medicines, toothpowder, candles, postcards, sewing needles, kerosene stoves, etc. Revenue loss on account of lower excise duties on these goods, which are essential components in any poor family’s consumption basket, are certainly not tax sops to big private companies.
Another example is that of personal income tax concessions. These are given for encouraging savings and increasing disposable incomes of the lowest rungs of income taxpayers. These amounted to Rs.40,414 crore, or 0.4% of GDP in 2013-14 and were on account of investments in various savings instruments, repayment of housing loan, payment of tuition fees for children (Section 80C of the Income Tax Act, 1961), deduction on health insurance premium (Section 80D), higher basic exemption limits for senior citizens and women. These are welfare enhancing measures and are in no way unwarranted giveaways.
Customs duty concessions are mostly for imported goods that are used as inputs for exports as defined under Section 25(1) of the Customs Act. This is a standard global practice. This is not revenue foregone but simply a necessary measure for making India’s exports globally competitive.
Custom duties were reduced from their peaks of around 220% in 1991 to 30% in 2002. But it seems that official estimates continue to include the difference from peak bounded rates and actually applied rates in revenue foregone. Can an outcome of major policy decisions that results in the reduction of peak tariff rates be considered as revenue foregone?
There are then the area-based incentives. These amounted to Rs.17,999 crore in 2013-14, or 0.2% of GDP. These are given to hilly and backward areas such as north-eastern states and states enjoying special status, such as Jammu and Kashmir. These concessions are a consequence of a political decision and not due to any demand by the private sector. These concessions are given to improve regional and spatial equity and for expanding employment and economic activity in these backward regions. It is intellectually dishonest to claim these measures as tax sops when they are being used to further a cherished principle of the republic: equity between states.
Before discussing tax concessions for private companies, it should be pointed out that corporate taxes accounted for 34% of total tax revenue and 63% of direct tax revenue in fiscal year 2013-14. Moreover, corporate tax revenue has increased at a compound annual rate of 20% over the last 10 years. This is by far the fastest growing segment of tax revenue. In contrast, the agriculture sector does not pay any tax whatsoever and custom duties and excise duties have increased on average by 15% and 7.7%, respectively, over the same period.
Concessions given to private companies or revenue foregone was Rs.68,720 crore in 2012-13 and not Rs.5.66 trillion as is often claimed. In 2013-14, these are expected to increase to Rs.76,116 crore or 0.7% of the GDP or mere 7% of total tax revenue. Concessions include those given for software technology parks (STPs), special economic zones (SEZs), the power sector, accelerated depreciation for industries established in hilly regions and weighted deduction for expenditure on scientific research.
Various studies show that SEZs and STPs have significant positive impact on foreign-exchange earnings and employment generation. Thus, they contribute directly to poverty reduction. The net cost-benefit impact of SEZs, despite their tax exempt status (although the minimum alternate tax is illogically applied to units located there) is very positive. China powered its way into global export markets by the massive use of SEZs. So, to argue against these concessions is to deny our companies the opportunity to become globally competitive and increase India’s share in global export markets, which currently is lower than 2%.
Most concessions included in revenue foregone undoubtedly contribute to enhancing public welfare or promoting exports. These should not be included in estimates of revenue forgone. Therefore, the finance ministry would do well to come up with a new methodology for calculating the actual revenue foregone and a new nomenclature for genuinely effective tax incentives.
It is important to deny the ideologues this annual tamaasha of private sector bashing.
Rajiv Kumar and Geetima Das Krishna are, respectively, senior fellow and senior researcher at the Centre for Policy Research, New Delhi.
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