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Taxing concessions

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Business Standard New Delhi
Last Updated : Jun 14 2013 | 4:18 PM IST
The burden of Finance Minister P Chidambaram's constant efforts to raise tax revenue need not fall heavily on the entire middle class if he directs his attention towards the sectional tax sops handed out by his ministry. These today add up to a whopping one-seventh of total tax collections. A recent study by the Delhi-based National Institute of Public Finance and Policy (NIPFP) has estimated that Rs 54,560 crore of tax sops are being given out each year. This works out to 1.6 per cent of GDP, which is higher than the 1.2 percentage point hike in collections that the Twelfth Finance Commission wanted the tax department to achieve by 2009-10. In other words, to reach his decade-end target, Mr Chidambaram needs to do nothing more than just remove the plethora of concessions given at the moment. Such concessions are becoming increasingly difficult to finance at a time when populist expenditures are rising sharply. That apart, there is the larger issue of whether such incentives even achieve what they are supposed to. A study by the economic think tank ICRIER, for instance, examined the impact of different variables in attracting investment to Asian countries and found that India's market size, the availability of skilled labour and electricity were statistically more significant than fiscal incentives. A similar conclusion was arrived at by the global consulting firm McKinsey at around the same time. Indeed, the NIPFP points out that if fiscal concessions actually made the kind of difference they were supposed to, there would be a lot more of investment in the north-east of India than there is today. Similarly, if, as a study shows, nearly 60 per cent of the income of organisations registered as charities comes from business activities, there is little justification for giving them handsome tax incentives. On agriculture, the NIPFP finds that if only a very small proportion of farmers are taxed (those with over 8 hectares of land), it can yield a tidy sum.
 
Apart from the issue of whether tax sops are yielding the desired results, the other important aspect is the distortions they cause. There is already enough literature on how SSI concessions have ensured that the segment has never matured. Similarly, the NIPFP estimates that customs and excise exemptions, which add up to around Rs 4,000 crore, have given rise to a huge maze of red tape, as each and every exemption needs to be monitored and certified, and in all probability, also has to be facilitated through "speed money". Most organic chemicals, for instance, can be imported at a duty of around 20 per cent, but some users can bring them in at a zero rate. But in order to avail themselves of this, the units have to be certified to show that they fall within the relevant category, and then another certification is required to show that the imports have been used for the purpose intended. This, in fact, is one of the reasons why customs formalities in India remain complex and cumbersome and India stays high on the list of corrupt countries. Removing the maze of tax concessions will do three things""increase collections, raise efficiencies, and reduce corruption. Surely this can outbalance the adverse fallout of antagonising specific lobbies which had managed to secure the concessions and exemptions in the first place.

 
 

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First Published: Nov 07 2005 | 12:00 AM IST

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