The government stands to lose half of its gross tax collections on account of various exemptions. This explains the emphasis on phasing out exemptions.
According to the department of revenue, estimated revenue foregone in 2006-07 stands at Rs 2,35,191 crore, as reported in the Union Budget. The government could, however, draw solace from the fact that while the revenue foregone as a percentage of gross tax collection in 2005-06 was 56.43%, it is expected to be 50.27% in 2006-07.
The maximum revenue foregone is on account of exemptions for Customs duty, followed by excise, corporate income tax and the least on account of exemptions for personal income tax. The major tax expenditure on individual tax payers in the financial year 2005-06 was on account of higher basic exemption limits for senior citizens, women and deduction available under section 80C of the income tax on investments in various savings instruments.
The revenue foregone on account of higher basic exemption limits has been calculated by multiplying the revenue foregone per citizen and women with their respective numbers which is based on the number of returns filed in 05-06.
According to the income-tax department, the total number of returns filed by individuals in 2005-06 was 2,42,14,698. Assuming that 10% of the total returns were filed by senior citizens, the number of citizens availing higher exemption limit is 24,21,470. Out of the balance 2,17,93,228, it is assumed that 20% have been filed by women. Therefore, the total number of women availing an exemption limit of Rs 1,35,000 is 43,58,646.
The revenue foregone per senior citizen is Rs 12,240 as the tax liability on an income of Rs 1,85,000 (basic exemption limit for senior citizens) is Rs 12,240. Similarly, the tax liability per woman is Rs 3,750 the tax liability on an income of Rs 1,35,000. The estimates for 2006-07 have been done by assuming a 10% growth in the number of returns filed by senior citizens and woman.
The revenue foregone on account of deduction under section 80C has been estimated by assigning different levels of investments in savings instruments and payments of tuition fees of children for different income categories of individual assessees. The tax liability on the average total income (income after deduction under Section 80C) and the average gross total income (income before deduction under 80C) of each category has been assessed.