While discussing higher petrol prices, TV anchor Arnab Goswami asked why the middle class shouldn’t get a big petrol subsidy when corporations got tax breaks of Rs 529,000 crore. He got this huge figure from an annual budget document calculating “revenue foregone” through various tax exemptions and exceptions.
The left has long decried this “revenue foregone” as corporate loot. Sorry, but this is claptrap. The economic assumptions of the budget document are illiterate enough to make an undergraduate blush. The methodology assumes that a rise or fall in tax rates does not impact demand. Really? Does anybody believe that a higher petrol tax will have no effect on petrol demand? Of course it will. Similarly, a tax cut will stimulate demand.
This is why taxes were cut in 2008-09-to generate a big stimulus for an economy hit by the Great Recession. At the time, the left supported a strong stimulus to help the aam admi. Yet today, some tax cuts are being called “revenue foregone” and decried as corporate loot.
The great tax lesson of economic reform is that cutting tax rates does not necessarily mean less revenue, and may mean hugely increased revenue. Since 1991, taxes have been slashed on incomes and goods, yet tax revenue has remained around 9-10% of GDP. Revenue has not been foregone.
The corporate tax rate was 51.75% in 1991, and collections were about 1% of GDP. The corporate tax rate today is down to 30% (plus some surcharges and cesses). Has there been a huge revenue loss? On the contrary, corporate tax collections have skyrocketed to 3.7% of GDP! Besides, lower tax rates have spurred much faster GDP growth, so the government is getting 3.7% of a far larger economic cake.
The finance ministry must abandon its ridiculous methodology for calculating “revenue foregone.” I am all for exposing the long list of tax exemptions, many of which are unwarranted, but oppose nonsensical calculations that mislead instead of clarifying.
The notion that tax exemptions are aimed only at fat cats is false. Rajiv Kumar and SK Ghosh of Ficci recently calculated that of the supposed “revenue foregone,” Rs 198,291 crore comprises tax breaks duty for mass consumption goods like medicine, toothpowder, candles and kerosene. These are aimed directly at the aam admi. Revenue forgone also includes massive tax breaks for crude and petroleum products (an estimated Rs 58,190 crore in 2012-13). So, in a sense, Arnab’s wish has come true: the middle class is getting a big oil tax break!
Kumar and Ghosh calculate that another Rs 174,418 crore of “revenue foregone” comprises import duty concessions for inputs into export production. Exempting such inputs is standard global practice. It would be stupid to tax and maim exports.
In 1991, Manomohan Singh made software exports tax-free. They zoomed, creating created millions of jobs, and these employees contributed huge sums to the exchequer through direct and indirect taxes. Was this just corporate loot?
Another Rs 50,658 crore of exemptions relate to insurance premia, contributions to charities, interest payments on loans for higher education, etc. This aids the middle class, not Tata and Birla.
Excise duty concessions have been given to industria l investors in hilly, backward states like Himachal Pradesh and Uttarakhand. The demand did not come from corporates but politicians who said such tax breaks were essential to lift their backwardness and reduce inter-state disparities. Many tax breaks have been given for scheduled castes and tribes, and sundry other vote banks.
The government gives tax breaks for R&D to encourage it. How can you call this corporate loot? Accelerated depreciation is often given to encourage more investment. Is it a crime for investors to respond to this by investing more?
Tax exemptions have been given for special economic zones. I myself have opposed this, arguing that exporters in such zones require world-class infrastructure rather than tax breaks. Nevertheless, the fact is that exports from these SEZs have zoomed.
China is the world leader in SEZs. These have helped make it the fastest growing country in the world, with the fastest poverty reduction in history. Has China massively foregone revenue in SEZs, just to benefit fat cats? Only the ideologically blind will think so.
Now, i myself have long opposed many tax exemptions and exceptions as unwarranted distortions benefiting crony businessmen and vote banks. We need a tax code that is more or less uniform across goods and services, and across states and industries. Only minimal exceptions and exemptions should be permitted for clearly articulated goals like poverty reduction or exports. So, to some extent, the left and i agree on this. But we emphatically disagree on what is “revenue foregone”, and on who benefits.