The government 'lost' a whopping Rs 4.2 lakh crore in 2008-09 as revenue foregone on account of various tax exemptions, a sum almost equivalent to the budget deficit for the current financial year.

This probably forms the basis of the proposed withdrawal of tax incentives as recommended in the Direct Tax Code released by the finance ministry on Wednesday. The government had incurred an estimated loss of Rs 4,18,096 crore by way of giving tax rebates and exemptions to corporate and non-corporate entities last year, according to the finance ministry. The estimated exemptions included both direct and indirect taxes.

The figures for the previous three years were little less but still accounted for more than Rs 2 lakh crore in each year. For instance, in 2005-06 the total estimated revenue foregone was Rs 2,06,700 crore. This rose to Rs 2.40 lakh crore in 2006-07 and Rs 2.85 lakh crore in 2007-08.

The exemptions and deductions are related to infrastructure and regional development, promotion of exports and industries and on account of various deductions allowed to individuals on many savings instruments. The deductions included expenditure on maintenance of persons with disabilities, for payment of medical insurance premia, promotion of higher education, donations for charitable work, etc.

The recently released direct tax code, which after incorporating suggestions is likely to be presented before Parliament as a Bill in the winter session, is quite sharp in its criticism of various kinds of exemptions and their impact on the exchequer.

"Tax incentives are inefficient, distorting, inequitous, impose greater compliance burden on tax payers and on the administration, result in loss of revenue, create special interest groups, add to the complexity of tax laws, and encourage tax avoidance and rent seeking behaviour," the chapter on tax incentives states.

The proposed tax code, which is likely to replace the existing Income Tax Act once passed by Parliament, says all business tax expenditure, other than for activities which create externalities, will be withdrawn.

However, the new tax code proposes that non-profit organisations like scientific research associations, news agencies, professional associations, welfare funds, education and medical institutions, religious trusts, trade unions, etc. will continue to get concessional tax treatment.