In his next budget Finance Minister P Chidambaram will seriously consider phasing out large tax exemptions that are hurting the economy.
If all the exemptions currently permitted are continued, they will cause an estimated revenue loss of Rs 100,147 crore in 2006-07 - up from Rs 85,297 crore in 2005-06. The government has already identified 21 customs-related exemptions and 54 excise exemptions which are likely to be withdrawn from the next financial year.
In the last budget too, Chidambaram had removed 68 central-excise exemptions.
A 16-page Finance Ministry note circulated on Friday has projected an additional revenue loss of Rs 102,621 crore by 2010, from the concessions special economic zones (SEZs) currently enjoy, even if only 70 of them are operational by then. In this financial year alone, Chidambaram has estimated a revenue loss of Rs 19,092 crore from SEZs.
The tax exemptions given to different sectors of industry, taxpayers and regions are termed tax expenditure or tax subsidies.
At a meeting of the Parliamentary Consultative Committee attached to the Finance Ministry on Friday, Chidambaram emphasised the "need to prune tax incentives" to end the revenue deficit in three years and reduce the fiscal deficit.
In the run-up to the next budget, Chidambaram will work towards evolving a national consensus on phasing out large tax exemptions. Ministry sources said he would hold consultations with corporate leaders, exporters and the UPA's coalition partners.
Tax waivers to be reviewed
Chidambaram's best bet to reduce exemptions will be stopping the freebies given to the corporate sector that are estimated to cause a revenue loss of Rs 83,306 crore in 2006-07.
Most tax sops relate to corporate investments in backward areas, exemptions on the export of goods and services, NRI inflows and accelerated depreciation on capital investment made by companies.
Sources said the finance minister might announce a road map spread over three years after which tax exemptions will be restricted to life-saving drugs, security and strategic-interest items, goods for relief and charitable purposes, items and contracts under international obligations, and small-scale industries.
Tax exemptions have not found favour with many experts. Said former RBI governor Dr Bimal Jalan, "Irrespective of who the investor is, income from say, stock markets, mutual funds, corporate profits or any other investments should be taxed. The rates may be pegged at a lower level for some categories." He said tax exemptions did not necessarily generate more employment and productivity. "Exemptions may be limited to socially worthwhile causes like education, health care and the development of water resources," he added.
The panel on tax reforms headed by Raja Chellaiah and the Parthasarathi Shome Committee had, in 1992 and 2001 respectively, recommended an end to the "exemptions raj".
In its report in 2002, the task force on indirect taxes headed by Vijay Kelkar had said that the "most direct way to raise tax to GDP ratio is to widen the tax base by reviewing and removing to the extent possible, the tax exemptions".
In a policy paper in 2005, the National Institute of Public Finance and Policy had said that even "area-based exemptions (the Northeast, J&K, etc) may be reviewed".
The Planning Commission's approach paper for the Eleventh Plan - approved last month - too recommended that "tax bases should expand and distorting exemptions (should) be removed".