A key parliamentary panel has said that the exemptions and deductions provided under the current tax laws were loaded in favour of corporates and big taxpayers, providing support to the proposed direct taxes code that has suggested replacing all profit-linked exemptions with investment-linked ones.

The standing committee on finance also suggested a review of the tax and duty exemptions to special economic zones or SEZs.

Keeping in mind the fact that most of the exemptions have outlived their purpose...it would be just and equitous to put in place a policy on exemptions, the committee said in its 12th report.

Indias direct tax regime provides a large number of exemptions and deductions because of which the incidence of tax on corporates is lot lower than the nominal rate of 30.9%, including the education cess.

The effective tax rate for corporates in 2008-09 was 22.78% while that for the biggest companies or those profit before tax in excess of Rs 500 crore only 22%.

The direct taxes code, a draft of which is being debated in the government, has proposed a flat 25% tax on corporates but suggested removing all profit-based exemptions.

The code is expected to be adopted from the next fiscal. The code has also suggested the same regime for special economic zones. The commerce ministry has been arguing that the current regime for SEZs continue.

The committee has asked the government to set up a study group to review the desirability of tax and duty exemptions to SEZs to bring out the costs of tax exemptions vis--vis the benefits.

The panel made it clear that the policy on exemptions should not just reduce the percentage of tax foregone but at the same time encourage household savings, foster social security and generally favour small taxpayers.

The committee pointed that the tax concessions and exemptions provided in general have been huge and phenomenal amounting to more than half of the total direct tax collections in 2009-10. The committee notes with concern that the huge amount of revenue lost to the exchequer to more than Rs 1,50,000 crore.

In fact, if the aggregate exemptions in both direct and indirect taxes is taken into account, it works out to a massive Rs 5,02,299 crore in 2009-10 which is almost 80% of the total revenue collections.