By TIOL News Service

NEW DELHI, March 3, 2006 : FOR every one rupee of tax revenue on account of Customs, Excise, Corporation tax and personal income tax in 2004-05, the Government sacrificed Paise 55 in the form of subsidy payments to preferred tax payers.

In other words, total receipts from these four taxes would have been higher by 55% had the Government not remained glued to a complicated web of special tax rates, exemptions, deductions, rebates, deferrals and credits that are collectively known as “tax preferences”.

This is the underlying message of maiden attempt to quantify the revenue foregone by the Government in year 2004-05 on the basis of deficient data, extrapolations, assumptions and other factors that can be questioned.

The Finance Ministry has acknowledged these limitations in this initiative to reckon revenue foregone. This initiative is dubbed as Tax Expenditure Statement that Finance Minister P. Chidambaram mentioned in his budget speech. The 5-page statement appears as annexure 12 to the Receipts Budget 2006-07.

The statement has reckoned revenue foregone at Rs 158,661 crore. This is exclusive of Rs 35,430 Crore outgo on exemptions enjoyed by exporters under different schemes. Finance Ministry does not consider them as incentives as they largely represent input tax credit that has to be allowed in order to offer a level playing field to exporters in the international markets.

The revenue forego of Rs 158,661 crore amounts to 54.94% of the total tax revenue of Rs 288,761 crore that accrued from four taxes in 2004-05.

One can thus interpret this fact as: The Finance Minister renounced Paise 55 before collecting Rupee 1 as tax receipts.

Of the total revenue foregone, the largest chunk of Rs 57,852 crore is accounted for by corporation tax preferences followed by export credit-adjusted Customs tax preferences of Rs 57131 crore.

The third largest share of revenue sacrifice of Rs 30,449 crore is accounted for by excise inclusive of forgo on account of exemption notifications. This is followed by revenue forgo of Rs 11,695 crore on account of personal income tax.

The Statement has listed separately income tax preferences of Rs 1534 crore against cooperatives.

The statement is bound to give a new dimension to the big debate of subsidies. The Finance Ministry had so far excluded tax subsidies from the list of major and minor subsidies. The fact as it has emerged now is that tax subsidies are mega subsidies that outweigh all other subsidies put together.

Tax subsidies/preferences are actually meant for relatively rich persons or those who have taxable income or operate businesses where indirect taxes are unavoidable. The triple major subsidies of food, fertilizers and petroleum are either enjoyed directly or indirectly by all sections of the society.

Tax subsidies have thus opened a can of worms. The worms that would emerge from the can would become more colourful as they relate to tax preferences given to importers from countries covered by free trade and preferential trade agreements that the Government has been pursuing or signing with vengeance over the last two years.

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