Economic survey says the rich get implicit subsidy of more than Rs1 trillion
3 min read 26 Feb 2016, 03:39 PM ISTThe Economic Survey says that though subsidies are meant for the poor, they are benefiting the relatively rich
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New Delhi: The well-off in India receive an implicit subsidy of more than ₹ 1 trillion, according to the Economic Survey 2015-16, which stresses the need to remove this anomaly.
Taking into account small savings schemes, tax/subsidy on cooking gas, railways, power, aviation turbine fuel, gold and kerosene, the survey says that though subsidies are meant for the poor, they are benefiting the relatively well-off.
“There are a fair amount of government interventions that help the relatively better-off in society. In many cases, this help takes the form of explicit subsidisation, which is surprisingly substantial in magnitude," the survey says. “Addressing these interventions and rectifying some egregious anomalies may be good not only from a fiscal and welfare perspective, but also from a political economy welfare perspective, lending credibility to other market-oriented reforms," the survey said.
It argued that the ₹ 1 trillion going to the “better-off merely on account of six commodities plus the small savings schemes represents a substantial leakage from the government’s kitty, and an opportunity foregone to help the truly deserving".
The six ‘commodities’ are cooking gas, railways, power, aviation turbine fuel, gold and kerosene.
The survey argued that the rich also benefit from the EEE or exempt-exempt-exempt tax treatment being enjoyed under the Public Provident Fund (PPF).
“We can indirectly infer how well-off beneficiaries of the PPF scheme are. Roughly 62% of total 80C deductions in FY 2013-14 were accounted for by taxpayers with gross taxable income more than ₹ 4 lakh (47% by those earning more than ₹ 5 lakh). These individuals are at the 97.3rd and 98.4th percentiles of the income distribution respectively—hardly ‘small’," the survey said.
Pointing out that gold is a demerit good that is mainly consumed by the rich, the survey questioned why it was taxed at only 1-1.6%.
“Gold is a strong demerit good: the ‘rich’ consume most of it (the top 20% of population account for roughly 80% of total consumption) and the poor spend almost a negligible fraction of their total expenditure on it. Yet gold is only taxed at about 1-1.6% (states and centre combined), compared with tax of about 26% for normal goods (the central government’s excise tax on gold is zero compared with 12.5% for normal commodities)," the survey said, adding that this huge subsidy mainly accrues to the better-off.
It also questioned why aviation turbine fuel was taxed at only 20% by states as against petrol and diesel which are taxed in the range of 55-61% when a majority of air travellers are well off. The survey made similar arguments on the subsidy for cooking gas and kerosene.
“Kerosene makes up about 1% of the consumption basket of the poor; however about 50% of the kerosene given under PDS (Public Distribution System) is consumed by the well-off and the rest by the bottom 3 deciles, showing that half of the subsidy benefit goes to the well-off section," it said.
Pointing to the problems associated with economic inequality, chief economic advisor Arvind Subramanian said on Friday that the richest 1% in India earned 12.9% of all income in 2012, up from 9% in 1998.
“Comparable to UK, lower than US," he tweeted after the release of the Economic Survey, which dwells on the inequalities in different income groups in the country. Tax benefits, he said, benefited the super rich more than others. The survey showed that 10% of the tax bracket starts at the top 5.8 percentile of the income distribution, 20% starts at top 1.6 percentile of the income distribution, and 30% starts at the top 0.5 percentile of the income distribution.
“Mandatory deductions from employee salaries higher for poor than rich: 15% for ₹ 5,500 earner vs 0.5% for ₹ 55,000 earner. Who benefits from tax benefits? Not the middle-class or the rich, but the super rich," Subramanian said.
Seeking to correct the anomaly, the government has started the process of streamlining subsidies. It has sought to restrict the cooking gas subsidy to only those whose annual income is less than ₹ 10 lakh.
The government spends nearly 4.2% of gross domestic product on subsidising various commodities and services, the survey said, adding that the phasing out of corporate tax exemptions and implementation of the goods and services tax are steps toward correcting the fact that the rich are benefiting from subsidies.
N.C. Saxena, former member of the National Advisory Council said an effort has been made for the first time to quantify and classify the subsidy burden.
“We talk about subsidy for the poor but do not realize that the rich also benefit from these subsidies. I hope more discussion takes place on this and the budget announces some concrete steps to take this forward," he said.
Nikita Mehta and Pretika Khanna contributed to this story.
