JULY 10, 2009

Revenue sacrifice is almost twice the Revenue Deficit

By Naresh Minocha, Our Consulting Editor

THE revenue foregone due to various direct and indirect taxes has shot up by whopping 46.67% to Rs 4,18,095 crore in 2008-09 from Rs 2,85,052 crore in preceding year, according to Receipts Budget for 2009-10.

The revenue sacrifice in 2008-09 was 68.95% of the total tax collections, as compared to 48.16% of the total tax collections in previous year.

The document says: “the amount of revenue foregone continues to increase year after year. As a percentage of aggregate tax collection, revenue foregone remains high and shows an increasing trend as far as corporate income-tax is considered for the financial year 2007-08. In the case of indirect taxes, the trend shows a significant increase for the financial year 2008-09 due to reduction in customs and excise duties. Therefore, it is necessary to reverse this trend to sustain the high tax buoyancy.”

With the Finance Minister Pranab Mukherjee's tax proposals for 2009-10 projected to yield net additional revenue of Rs 2000 crore, the revenue foregone is unlikely to decline, says an analyst.

He points out that the revenue foregone in 2008-09 is 1.73 times the revenue deficit (Rs 2,41,273 crore) in the same year. This shows that revenue deficit can be theoretically wiped by reducing tax concessions, if there is political will. It is highly unlikely that curtailment of tax concessions would result in any significant drop in the growth rate of economy.

The Government was supposed to eliminate revenue deficit in 2007-08 under the road map for fiscal discipline drawn up under the Fiscal Responsibility and Budget Management Act 2003 (FRBMA).

This slipppage has, however, not at alarmed the new Government, which seems to be obsessed with lapping up the debt and splurging cash under the garb of boosting economic growth.

Mr. Mukherjee has thus preferred to increase the revenue deficit to 4.8% of gross domestic product (GDP) in the current financial year as compared to 4.4% of GDP in 2008-09.

In the total revenue sacrifice of Rs 4,18,095 crore, customs duty concessions account for Rs 2,25,752 crore. The excise duty concessions come next with Rs 1,28,293 crore, followed by corporation income-tax (Rs 68,914 crore) and personal income-tax (Rs 39,553 crore).

The revenue loss due to these four tax preferences actually aggregate to Rs 4,262512 crore. The Finance Ministry has, however, deducted Rs 44,417 crore from this total to factor in tax neutralization of exports, resulting in aggregate revenue forgo of Rs 4,18,095 crore.

The Ministry has prefaced the revenue foregone statistics as: “the main objective of any tax system is to raise revenues to fund government expenditures. The amount of revenue raised is determined to a large extent by tax bases and tax rates. It is also a function of a range of measures – special tax rates, exemptions, deductions, rebates, deferrals and credits – that affect the level and distribution of tax. These measures are sometimes called tax preferences. They have an impact on Government revenue (i.e. they have a cost) and reflect the policy choices of the Government.”

The Receipts Budget says that tax preferences may be viewed as subsidy payments to preferred tax payers. Such implicit payments are referred to as tax expenditures.

As for customs duty foregone, crude oil and minerals account for the largest share of 21% at Rs 47,424 crore, followed by machinery with 13.8% share at Rs 31,262 crore. The third slot in the commodity group ranking of customs duty foregone is held by diamond, gold and jewellery with 12.2% share at Rs 27,841 crore.

The Ministry has divided excise revenue forego into two categories only. The area-based excise exemptions in hilly States and Kutch district of Gujarat thus accounted for Rs 10,327 crore forego. The balance Rs 1,17,966 crore out of the total excise forego was accounted for by all other excise concessions.

As for corporation income-tax forego, the largest amount (Rs14,344 crore) of revenue forgo in this case was accounted for by accelerated depreication. The second largest amount of forego (Rs 11,734 crore) was due to deduction of export profits of software technology park of India (STPI) units. The third largest amount of forego (Rs 7274 crore) was accounted for by deduction of export profits of export oriented units.

This analysis is based on 4,10,451 corporate returns filed electronically uup to 31 March 2009 for assessment year 2008-09.

The effective tax rate of the entire sample of returns was 22.24% as against the statutory tax rate of 33.99%.

The effective tax rate worked out to 18.25% in the case of non-corporate entities such as partnership firms and association of persons. This estimate is based on study of 4,62,053 entities that filed returns electronically.