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Tax exemptions: little sense in continuing them
February, 07th 2007

On last count, at least 260 million people in the country, make do with less than Rs 21 a day. That means 25 % of Indias population shares just about Rs 6,555 crore between themselves in a year. This is just about the same as the tax concession given by the government to the corporate sector for profits derived from setting up infrastructure facilities, SEZ, and so on.

The tax concessions for developing housing projects, storage and transportation of food grains and others are almost double the cash available for the poorest one fourth population of the country, at Rs 11,523 crore.
What is more, at a conservative estimate of the finance ministry the cost of tax exemptions for the sharp spurt in SEZ schemes is expected to touch Rs 100,000 crore in another four years.

If instead in any year, the government could distribute the sum to those below the poverty line as cash handouts, it would have immediately pulled most of these people above the poverty line.

On the other hand, the proponents of tax exemptions often say that the value addition to the economy, made by the benefiting companies, outweigh the losses.

But that is not yet adequately quantified. When the economy is cruising along on a high growth rate, there is a case for eliminating a large number of these exemptions. The finance ministry estimates that the tax exemptions on the big direct and indirect taxes added up to Rs 1,58,661 crore for the year 2004-05.

This is about two thirds of the total tax revenue collected for that year. To give another suitable comparison, the latest Economic Survey says the total spend by the central government for all social services and rural development programmes in the same year was Rs 57,724 crore, or just about a third of the cost of the tax exemptions for that year.

Prime Minister Manmohan Singh and finance minister P Chidambaram have already made their intention clear to d something about this in Budget 2007. This should therefore be one big action area to watch out for.

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