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Tax forgone helps new industries to come up
February, 28th 2015

There may be an element of overstatement in the finance ministry’s claim of revenue forgone on account of tax breaks to businesses and such unrealised revenue actually serves a conscious purpose of encouraging certain industries that would never have come up without these incentives, points out the Economic Survey 2014-15.

The survey, presented in Parliament on Friday, said the projected revenue forgone of Rs 11.4 lakh crore for 2013-14 is not in the nature of a receipt that was waived off by the government. It actually represents targeted incentives for the promotion of certain sectors. One factor contributing to the overstatement is the fact that the peak rate of customs duty on non-agricultural goods has been kept at 10% for a number of years as against schedule rates that are manifold higher.

Also, the estimate of tax revenue forgone does not factor in “externalities by way of ancillary economic gains due to the progress of any sector”, said the survey. While broadly justifying such tax breaks meant to promote industries, the survey also suggested that there may be a case for rationalising some of the tax exemptions. Already there is an 18.5% Minimum Alternate Tax (MAT) on companies the corporate tax liability of which falls below 18.5% of the book profits on account of tax breaks.

The survey said the the proposed Goods and Services Tax (GST) would reduce the overall tax burden on goods, which is currently estimated at 25-30%. The new indirect tax regime is also expected to make Indian products more competitive in world markets leading to higher exports and economic growth. However, in the near term, revenue gains to the exchequer may not be significant as GST would replace a number of state-level and central taxes and their cascading effect.

The budgeted 19.8% growth in gross tax revenue and a revenue buoyancy of 1.5 for 2014-15 on a GDP growth estimate of 13.4% at current market price may be an overstatement given the growth trends in both, said the survey.

Overstatement?

* One factor contributing to the overstatement — on revenue forgone — is that the peak rate of customs duty on non-agricultural goods has been kept at 10% for years as against schedule rates that are manifold higher

* Also, the estimate of tax forgone does not factor in ‘externalities by way of ancillary economic gains due to the progress of any sector’

* The budgeted 19.8% growth in gross tax revenue and revenue buoyancy of 1.5 for 2014-15 on a GDP growth estimate of 13.4% at current market price may be an overstatement given the growth trends in both

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