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The best rule in taxation is to keep it simple & straightforward
March, 05th 2012

February is normally a month when lobbying for tax sops reaches a crescendo. But this year, it has been quieter than usual. There is a reason. Budget 2012 is slated to be presented on March 16 instead of February 29. So, there is still time to catch the FM's ear.

Congress leaders in their wishlist have reportedly asked finance minister Pranab Mukherjee to present a 'please-all' Budget. On the personal-tax front, the Parliamentary Standing Committee on Finance has already fired the first salvo.

In its report on the Direct Taxes Code to be presented to Parliament next week, the committee has suggested raising the income-tax exemption limit to 3 lakh with another 3.20 lakh offered as rebate for eligible investments and spending. If the recommendations are accepted, the higher rebate will yield a saving of nearly 42,000 a year for those in the highest tax bracket.

In the same vein, government is reportedly toying with the idea of increasing the limit for investment in infrastructure bonds eligible for tax rebates in order to provide more funds for infrastructure investment. But such a relief will only skew the regime in favour of the better-off sections of society who can afford to invest in these bonds.

As a salaried taxpayer, in a regime where the salaried carry a disproportionate share of the tax burden while a majority of the self-employed and professionals get away scot-free, I must confess to feeling elated at the Standing Committee's recommendations.

But is it a case of private gain for public pain? Can the government afford such generosity in a scenario where the Centre's tax/GDP ratio is only 10%, down from 12% in 2007-08? Worse, tax expenditure or revenue foregone on account of various tax concessions was an astounding 4,82,432 crore, or more than the entire fiscal deficit for 2009-10.

Back in 1974, the late Dr Amaresh Bagchi, writing in The Economic and Political Weekly, had argued eloquently against tax sops, saying, "No one bothers to inquire what is the cost of the tax incentive to the community and whether it actually begets the intended benefit and whetherit is the best method of extending state support for a particular activity."

Also read: Budget 2012 | Union Budget | Rail Budget 2012 | Budget News

The same sentiment finds place in the Consultation Paper of the Task Force on the Direct Taxes Code and a research paper by the National Institute of Public Finance and Policy (NIPFP) - Raising the Tax-Ratio by Reining in Tax Breaks: An Agenda for Action, Amaresh Bagchi, Kavita Rao and Bulbul Sen - both of which make a strong case against riddling the tax regime with exemptions.

This is what the Consultation Paper of the Task Force on Direct Taxes had to say on tax incentives: "First, there ishardly any evidence to prove that tax incentives have, per se, increased investment or saving - for which these incentives were devised. On the contrary, the corollary has been proven very often - namely, scaling back of tax incentives and exemptions have almost always had a positive effect on tax policy, tax revenue, tax compliance and tax administration."

Additionally, tax incentives lead to a huge number of disputes and litigation. The fewer the tax incentives, the less is the discretionary space available to tax administrators and less is the scope for corruption.

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