Tax exemptions in spotlight after PM's remark

Prime Minister Manmohan Singh's recent statement that his government would focus on withdrawing tax exemptions has intensified speculation on the forthcoming Budget's measures on this front.

The hands of the ministry are believed to have been strengthened by the feedback, not made public yet, that the tax policy and legislation division under the Central Board of Direct Taxes received while seeking public comments on existing exemptions and deductions under the Income Tax Act, 1961.

The move is expected to culminate in the discontinuation and pruning of many exemptions and deductions.

Starting with Section 10(1) on agricultural income to Section 115-O that exempts special economic zone developers from paying dividend distribution tax on dividends to be distributed by them on or after April 1, 2005, the document had listed 62 different sections.

Presenting Budget 2006-07, Finance Minister P Chidambaram had pegged the total revenue foregone for fiscal 2004-05 at Rs 1,58,661 crore. Given that the revenue foregone on account of personal income tax was estimated at only Rs 11,695 crore, experts feel this category would not be focussed on in the Budget.

Given that the corporate income tax revenue foregone for the said period was much higher at Rs 57,852 crore, an attempt may be made to curtail exemptions on this head and others like excise and customs.

This may be easier said than done. Already, demands are being raised for the continuation of certain schemes.

The Confederation of Indian Industry has called for an extension of the Duty Entitlement Passbook Scheme beyond March 31, 2007, to ensure the competitiveness of Indian exports. It has also called for continuation of the target plus scheme and extension of income tax benefits for Export Oriented Units beyond 2009.

Experts like Nagesh Kumar, director general, Research and Information System for Developing Countries, feel that while there is a need to keep reviewing exemptions, all of them must not go.

"I am not one of those who would argue for doing away with all tax exemptions. The tax policy used to serve certain development objectives and today it needs to adapt to the changing scenario."

On February 28, for the second year running, the ministry is likely to quantify the overall estimated revenue foregone on account of major tax preferences.