New Delhi: Last year, the Union finance ministry sent out a clear signal that its intent to eliminate tax exemptions would be backed by real steps, and, for the first time, the Budget documents provided an estimate of the tax revenue foregone on account of numerous exemptions.
This year’s Receipts Budget has now estimated revenue foregone in 2006-07 would be Rs2,88,959 crore, about 62% of the year’s gross tax revenue. Given the strong and entrenched constituency for each exemption, policymakers are trying to build an effective case for eliminating exemptions by providing data on the revenue that is at stake.
Tax exemptions are a sore point with the finance ministry, as they are regarded as a subsidy bestowed on a chosen few. “The basic issue is not one of tax policy, but one of efficiency and transparency— programme planning requires that the policy objectives be faced explicitly,” said Receipts Budget 2007-08.
In the current financial year, both Prime Minister Manmohan Singh and finance minister P. Chidambaram have expressed the need to compress the number of subsidies doled out in the form of tax breaks.
The tax breaks given to corporations have led to effective tax liabilities that are far lower than the liability they are expected to bear.
A finance ministry study of a sample of over three lakh companies across different sectors showed the effective tax rate of the sample was 19.26%, way lower than the statutory tax rate of 33.66% in 2005-06 (the year the sample was studied).
What was more galling, perhaps, was the way in which the larger companies in the sample managed to pay a level of tax that was lower than the group’s average. Companies with a profit before tax above Rs500 crore had an effective tax rate of 19.10%.
The highest effective tax rate, 24.29%, was borne by the smaller companies, which had a profit before tax of up to Rs1 crore.
The biggest corporations ended up with a tax burden that was lower than that of corporates a fraction of their size in terms of profits.
The results are not surprising, as the ministry’s studies indicate that tax benefits coming out depreciation of equipment and the tangible assets are one of the biggest sources of revenue foregone.
Of all modes of taxation, indirect taxes provided the biggest set of exemptions.
Exemptions coming out of customs duty made up Rs1,23,682 crore of total Rs2,88,959 crore total revenue foregone in 2006-07. Excise duty made up Rs99,690 crore of revenue foregone.