39 tax exemptions cost govt Rs 68,914 crore in revenue foregone

The reform in archaic tax laws could well do away with the plethora of exemptions offered to firms that result in erosion of government revenues, reports Gaurav Choudhury.

The reform in archaic tax laws could well do away with the plethora of exemptions offered to firms that result in erosion of government revenues.

HT Image

In income tax alone, firms are offered as many as 39 exemptions, most of them sector specific such as tax holidays offered to units set up in special economic zones, software technology parks and depreciation allowances among others.

These cost the government Rs 68,914 crore in 2008-09.

The finance ministry, which has collated the tax filings of 4,10,451 companies, have found that there have been a sharp rise in revenue forgone by the government on account of certain exemptions — including accelerated depreciation, which shot up from Rs 73,96 crore in 2006-07 to Rs 12,946 crore in 2007-08 and further to Rs 14,344 crore in 2008-09.

Under accelerated depreciation, the amount of depreciation accounted for each year is higher during the early years of the life of an asset. This has benefits both from the accounting as well as taxation perspective.

“It needs to be seen whether this sharp rise is because of higher new investments,” said a government official who did not wish to be identified.

The government recently unveiled a draft direct tax code that proposes to change archaic tax laws, cut corporate tax rates to 25 per cent, phase out exemptions and simplify rules on corporate mergers.

“The amount of revenue foregone continues to increase year after year. As a percentage of aggregate tax collection, revenue foregone remains high,” the finance ministry study said.

During 2007-08, the revenue foregone was 48.16 per cent of the total aggregate tax collections, which increased to 68.95 per cent in 2008-09.

“It is necessary to reverse this trend,” said the official.

The study showed the average effective tax rate by corporations in India was 22.24 per cent — substantially lower than the statutory tax rate of 33.99 per cent. Importantly, the effective tax rate for private companies was even lower at 21.28 per cent, as compared to government-owned companies that paid 25.69 per cent effective tax.

The tax code said the removal of these exemptions will result in a higher tax-GDP ratio.