Tax Expenditures in India (2006–2012)

Abstract

Tax expenditures, which are like automatic device for granting quick relief to the beneficiary account without actual transfer of funds; have become so popular in India that practically all government committees have come up with recommendations for introduction, extension, enlargement or maintenance of tax expenditures. By using tax expenditure device, the Indian government has intended to influence the resource allocation, investment pattern, and guide flow of resources into desirable channels, as also encourage savings, investment, export, development of particular areas, agriculture, research and development, etc. No a-priori judgment can be made regarding the exact impact of tax expenditure provisions. Only generalizations are possible. Among different methods of measuring tax expenditure, 'revenue foregone' is still the best possible method and brings transparency in the matter of tax policies. Data in respect of 'revenue foregone' in India show that total revenue foregone has shown a rising trend both for corporate and non-corporate tax payers, revenue foregone has always been higher in case of corporate tax payers as compared to non-corporate tax payers and the Central Government is losing on an average about 25% of its gross tax receipts due to various exemptions, deductions, etc. Further, effective rate of tax has been much lower at about two third of the statutory tax rates. Moreover, effective tax rate decreased in reverse proportion to profits. Several problems have been encountered in the operation of tax expenditure provisions in India such as scattering of provisions, proliferation, benefit being higher for higher income groups, diversion of savings, procedural bottlenecks, complexities and ambiguities in tax laws and frequent changes. Despite these problems, it is generally agreed that tax expenditures should be preferred because they do not make use of government funds directly and they are merely tax reduction techniques. Hence, to make such provisions more effective, it is desired that they should be linked to performance, they should be well targeted, there should be rearrangement of provisions, administrators should ensure that tax expenditures are not converted into tax loopholes, there should be proper follow-up action and a Tax Research Institute should be set up within the Income Tax Department to evaluate the impact of various exemptions and incentives.