Income-tax laws have been a major instrument for promoting political, social and economic policies in almost all the countries of the world.
These objectives are sought to be achieved by grant of tax concessions and take the form of exemption from tax (full or partial), deductions, deferrals, tax credits, tax holidays, etc. Sometimes, preferential rates of tax for some classes of incomes or categories of taxpayers are also provided for.
Prior to year 2006, no assessment was made of revenue loss. Consequent to tax preferences, Mr P. Chidambaram, while presenting the Budget for 2006-07, mooted the idea of placing an annual statement of revenue foregone before Parliament as ‘tax expenditure statement'.
During the Budget exercises for 2011-12, statements for 2009-10 and 2010-11 were placed before Parliament.
Revenue loss
Revenue loss from exemptions and deductions during these years is summarised below.
The income tax foregone for 2009-10 and 2010-11 for corporations was Rs 72,861 crore and Rs 88,263 crore; for non-corporate assesses (AOPs, Firms & BOIs) Rs 4,845 crore and Rs %,436 crore; and for individuals Rs 40,197 crore and Rs 45,222 crore respectively.
For the corporate sector because of such exemptions and deductions, the effective rate of tax was 23.53 per cent as against the statutory rate of 33.99 per cent.
For non-corporate assesses (Firms, AOPs & BOIs), the effective rate of tax is 20.78 per cent vis-à-vis statutory rate.
For individuals, the effective rate of tax in their cases has not been worked out because of (i) composition of taxpayers in the category of salary and non-salary taxpayers and (ii) progressive rate of taxes.
Tax preferences
The importance of tax incentives in a tax system cannot just be brushed aside. It has to be appreciated and accepted as an established situation that a tax system cannot be totally free from such provisions.
What is needed is a balanced well laid-out policy and to ensure that these benefits accrue only to those sections of taxpayers, who deserve and the economy as a whole benefits from these.
There should no adhocism in giving these and decisions in this regard should not be influenced by lobbying by some quarters at the cost of teeming millions in the country Hence, the revenue loss, as mentioned earlier, cannot be avoided what is needed is well-planning to achieve the objectives for which these are designed.
Also, a study regarding areas where revenue loss occurs consequent to these should be made to find out whether the objectives sought to be achieved by foregoing tax is realised.
(The author is a former chairman of CBDT.)