It is very revealing how much companies and individuals do not pay as tax because they are legally entitled to claim the amounts as a tax deduction. The total of revenue foregone comes to over Rs 4 lakh crore i.e, revenue lost due to tax breaks. Budget numbers show that the total revenue forgone in 2008-09 was Rs 418,095 crore. The fiscal deficit for 2009-10 is estimated to be Rs 4 lakh crore. That means what the government gave away by way of tax breaks in the last fiscal year would have more than covered its projected excess expenditure this fiscal year. Another way of looking at the same thing is this: a complete scrapping of all tax breaks will bring down net market borrowing from Rs 4 lakh crore to zero. While much anguish has been expressed about the sharp rise in fiscal deficit, the amount of revenue lost registered a 30%-plus rise between 2007-08 and 2008-09.

The largest giveaways come from excise and customs. In 2008-09, the ratio of revenue forgone to total tax collections went up from 15% to 21% in the case of excise duties; for customs duty, the increase was from 26% to 37%. The change was marginal in case of corporate taxes and for personal taxes.

Since excise and customs concessions account for the bulk of revenue forgone, corrective action should concentrate on that. Correcting for giveaways will also remove distortions. The previous FM said that every tax concession has a father and grandfather.

Although many post-reform committees, from Chelliah to Kelkar, worked on removing tax breaks, the problem has worsened recently—the ratio of revenue loss to GDP has steadily gone up from 6.8% in 2005-06 to 8.5% in 2008-09.

Interestingly, India Inc does better than the average income taxpayer in terms of exemptions on direct taxes. Revenue forgone in corporate tax has gone up from 9.5% of total collections in 2005-06 to 11.4% in 2008-09. For income tax, the ratio has decreased from 6.8% in 2006-07 to 6.5% in 2008-09. When average income taxpayers crib that they have it the unfair, they may have a point after all. P Raghavan- Fe140709

It turns out, for example, that companies with a profit before tax of between Rs 10 and Rs 500 crore pay the least tax because the effective tax rates of these companies are absurdly low. But who made it that way, anyway?
The total revenue foregone in 2009-10 will be Rs 68,914 crore. The biggest chunk of this is accounted for by accelerated depreciation (Rs 14,344 crore). Next comes export profits of STPI units (Rs 11,734 crore). This is followed by export profits of export-oriented units (Rs 7,274 crore)."Deductions of profits of industrial undertakings derived from the production of Mineral Oil." The deduction is Rs 3,106 crore for 2009-10.

The break-up of revenues foregone shows that the impression of over-generous allocation for deductions is not justified in all cases. There may be a case for re-examining the need to continue with deductions where the amounts involved are too insignificant. Comparing the effective tax rates between public and private sectors (see Table 2), it is obvious that the public sector ends up paying a higher tax rate than the private sector. At the same time, the statement on revenues foregone makes an interesting analysis of the effective tax rate of various corporates after taking into account the exemptions.

The effective tax rate of corporates as a whole comes only to 22.1 per cent as against the ongoing mandate tax rate of nearly 33 per cent. This also differs according to company size. Companies with profit before tax of Rs 1-10 crore have an effective tax rate of 21.14 per cent. Companies with profits of Rs 10-50 crore have an effective tax rate of 20.14 per cent, while it is 21.85 per cent for companies with income exceeding Rs 500 crore. There is, therefore, not much variation in the effective tax rate because of the various sizes of categories.

The obvious solution to the anomalies is to move towards a flat tax regime, which will remove all exemptions and substitute the overall lower effective tax rate. But this might mean that public policy will be deprived of a useful tool for influencing taxpayer’s behaviour. Today, the tax policy provides incentives for small savings, export promotion, donations for charitable purposes. These purposes cannot be served in a flat tax regime, which has a lot of command itself. It is hoped that before enacting a new tax code, the Government will finalise its stance on the desirability or otherwise of introducing a flat tax regime. BL 200709

They account for around a sixth of the total tax collections in a year. What is distressing is that, of the Rs 103,808 crore of tax arrears as on March 31, 2008, nearly 40 per cent is categorised as ‘amounts not under dispute’. Surely, this suggests sluggish tax collection machinery; the large amounts under dispute (Rs 64,000 crore, or over 1 per cent of GDP) also suggest that there is plenty of scope for speedy dispute settlement and revenue realization.
KRSR/REV VER/200709