TIOL - COB(WEB) - 177
MARCH 04, 2010

Budget - revenue foregone - Large corporates bear less tax burden than 'small brothers'!

By Shailendra Kumar, Editor

THE Union Budget 2010 came, triumphed the heart of millions, and has now evaporated from the regular discussion table - only some odd patches of discourse can be seen in terms of select seminars, workshops and online analyses. Most TIOL Netizens may agree that the art of budget-making is all about making the first impression as positive and mind-gripping as it could get. Once the flight of imagination of TV viewers of budget presentation gets caught in the tunnel of a few tax concessions, it fails to take into account the tacit proposal that may make bigger holes in their purses. And this is what happened in this budget as well. The entire Opposition walked off, and the Budget Speech raced through the bumper-free House, and most TV viewers missed what they needed to actually hear about. Service tax is the winner or the villain ,as some Netizens may like to see it ,of this year Budget. Whatever has been given away through various concessions and preferences, would actually be indirectly recovered through the service tax route. Some may consider it as the ambidexterity of the Finance Minister, and a few may see it as unfair and non-transparent methods of policy-making as too many retrospective amendments have been made to prevail over some inconvinient judicial pronouncements.

But the fact of the matter is that there is generally no end to such debate. Instead of lengthening the same debate,today's Column would prefer to talk about some of the lesser known facts revealed by the Budget documents. Though there are many interesting features of this year Budget like 'The Macro Economic Framework Statement' and 'Implementation of Budget Announcements' but some of the eye-catching statistics have been provided through the 'Statement of Revenue Foregone'. Revenue Foregone is known by many names like tax preferences, tax expenditure, tax subsidy, tax incentives, tax concessions, tax sops etc etc.

A tax expenditure statement was laid before Parliament for the first time during Budget 2006-07. It was welcomed by all. It also lent credence to the Government's intention of bringing about transparency in the matter of tax policy and tax expenditures. Encouraged by the pleasant response, it was decided to make it an integral part of budget documents. And, thus it is the fifth such statement which has been laid in the House this year.

Thanks to the e-filing of returns and the growing computerisation of the working of the revenue field formations, interesting findings have emerged from the huge data collected by the CBDT and CBEC. For instance, can anyone make a guess about what what percentage of total corporate return filers declare losses? The Income Tax Department had received about 3.66 lakh corporate returns electronically upto December 31 st, 2009 for AY 2009-10. These returns represent about 90% of total returns in the same year. And about 43% of such corporates reported losses. Do we not find an answer to the question as to why was the MAT rate hiked by the Finance Minister in this year budget? We do.

Let's now move to some more statistics. India Inc reported Rs 6,68,580 Crore as profits before taxes (PBT) but actually declared a total income of only Rs 4,49,000 Crore for the fiscal 2008-09. They paid Rs 1,52,280 Cr as corporate tax.

Let's now find out why is it so tight or difficult for the Finance Minister to reduce the Corporate Tax Rate? Although the statutory tax rate was 33.99%, the effective tax rate for the entire sample of 3.66 lakh corporate return filers was 22.78%. The companies with profits before taxes of Rs 500 Crore and above totalled only about 179, and they accounted for 57.5% of the total PBT and 55.7% of the total corporate income tax payable. Why so much of gap between the statutory rate and the effective rate? The difference is claimed as various sorts of deductions / benefits.

Let's find out some little more startling facts. As compared to the effective tax rate of 25.5% for companies with PBT of upto Rs one Crore, it was only 22% effective tax rate for the large corporates of Rs 500 Crore and above. And the simple reason for such a state of reality is that the larger corporates avail more concessions than the smaller ones. A large number of companies (about two lakh) contributed a disproportionately lower amount in taxes in relation to their profits. When it comes public vs private companies, the effective tax rate for PSUs was 27.1% as compared to 21.6% for private companies.

Similarly in the case of manufacturing and services sectors, it is true that the services sector accounts for 60% of the GDP and contributes only about 1% of total tax mop-up but so far as the effective tax rate goes, it accounts for 23.5% as against 22% for the manufacturing.

Let's now find out which is the most pampered sector in the economy. An easy guess - it is the IT-enabled services providers, the BPO service providers and the software development agencies. The software companies account for the lowest effective tax rate of 11.8%.

Let's now take a look at some of the major heads which account for the maximum tax concessions so far as direct taxes are concerned.

Table 5: Major tax expenditure on corporate tax payers during financial years 2008-09 [sample size - 410451] and 2009-10 [sample size - 366233]

S No Nature of Incentive Revenue Foregone (in Rs. Crore) [2008-09] Projected Revenue Foregone (in Rs. Crore) [2009-10]
1 Deduction of export profits of STPI units (section 10A) 12321 14651
2 Deduction of export profits of Export Oriented Units [EOUs] (section 10B) 6714 7984
3 Deduction of export profits of units located in SEZs (sections 10A and 10AA) 2677 3183
4 Accelerated Depreciation (section 32) 21175 25180
5 Deduction of profits of undertakings engaged in development of infrastructure facilities (section 80-IA) 1553 1847
6 Deduction of profits of undertakings engaged in providing telecommunication services (section 80-IA) 4360 5185
7 Deduction of profits of undertakings engaged in generation, transmission and distribution of power (section 80-IA) 6352 7553
8 Deduction of profits of undertakings engaged in development of SEZs in pursuance to SEZ Act, 2005 (section 80-IAB) 1422 1691
9 Deduction of profits of industrial undertakings derived from production of mineral oil (section 80-IB) 936 1113
10 Deduction of profits of industrial undertakings derived from housing projects (section 80-IB) 813 967
11 Deduction of profits of undertakings set-up in Uttaranchal (section 80-IC) 1543 1835
12 Deduction of profits of undertakings set-up in Himachal Pradesh (section 80-IC) 1933 2299
13 Deduction of profits of undertakings set-up in North Eastern States (section 80-IC) 515 612

The total revenue foregone figure for 2008-09 is estimated at Rs. 66,901 crore. Accelerated depreciation accounts for the head under which the highest amount of tax revenue (Rs. 21,175 crore) has been foregone.

Among various sectors, deductions for Software Technology Parks (STPs), Export-Oriented Undertakings (EOUs), Power, and Telecom sectors account for 18%, 10%, 9% and 6% of the total tax foregone respectively.

Individual taxpayers

The total number of returns filed by individuals for the fiscal 2008-09 is estimated to be 2,79,49,329. According to the sample returns, 6 per cent were filed by senior citizens and 26.3 per cent of the balance returns were filed by women (other than senior citizens). Thus, the number of senior citizens availing the higher exemption limit of Rs. 2,25,000 is 16,66,040. Similarly, the number of women [who are not senior citizens] availing the higher exemption limit of Rs. 1,80,000 is 73,45,824.

The estimates for 2009-10 have been done by assuming a 5 per cent growth in the number of returns filed by senior citizens and women for financial year 2009-10 over what was filed for financial year 2008-09. Further, the revenue foregone on account of each senior citizen and woman [who is not a senior citizen] has been calculated by taking into account the higher basic exemption limits [Rs. 2,25,000 and Rs. 1,80,000 respectively]. The resultant figures are Rs. 7,500 and Rs. 3,000 respectively. Thereafter, the revenue foregone on account of each such taxpayer has been multiplied with their estimated number.

The deduction on account of certain investments and payments (section 80C) is estimated at Rs 26569 Crore. It is likely to go up to Rs 28946 Crore in 2009-10.

The second major head for individual taxpayers is the deduction on account of health insurance premium (section 80D) which is Rs 664 Crore for the FY 2008-09, and it may go up to Rs 723 Crore for the current fiscal. This tells us the story of why hectic lobbying by insurance companies ensues whenever a talk is initiated to withdraw such exemption.

Another finding which may interest Netizens is that are we Indians really charitable by nature? Can we continue to be as charitable as we are today with Sec 80G deduction. The Statement shows that deduction on account of donations to charitable trusts and institutions was only Rs 313 Crore in the FY 2008-09.

Before today's Column is concluded, it is important to take a look at the figure of deduction claimed for making contributions to political parties u/s 80GGC. It was only Rs NINE Crore in the fiscal 2008-09 and is likely to touch the two digit figure of Rs 10 Crore. If this is the reality what should one infer from cases like Ms Mayawati who was gifted huge cash and wealth by her party workers as claimed in her case decided by the ITAT last year.

The revenue foregone statement is indeed no less interesting for the indirect taxes as well. This Column would throw some light on the excise and customs duty foregone in Part II to be carried next week.

(To be continued)