What?s larger than the fiscal deficit, but doesn?t attract any corporate attention? Revenue lost due to tax breaks. Budget numbers show that the total revenue forgone in 2008-09 was Rs 418,095 crore. The fiscal deficit for 2009-10 is estimated to be Rs 400,996 crore. That means what the government gave away by way of tax breaks in the last fiscal year would have more than covered its projected excess expenditure this fiscal year. Another way of looking at the same thing is this: a complete scrapping of all tax breaks will bring down net market borrowing from Rs 397,957 crore to zero. And while much anguish has been expressed about the sharp rise in fiscal deficit, please note that the amount of revenue lost registered a 30%-plus rise between 2007-08 and 2008-09.

The largest giveaways come from excise and customs. In 2008-09, the ratio of revenue forgone to total tax collections went up from 14.8% to 21.2% in the case of excise duties; for customs duty, the increase was from 26% to 37.2%. The change was marginal in case of corporate taxes and for personal taxes.

Since excise and customs concessions account for the bulk of revenue forgone, corrective action should concentrate on that. Correcting for giveaways will also remove distortions since, whatever the motive, concessions always make a tax regime more complicated.

Although many post-reform committees, from Chelliah to Kelkar, worked on removing tax breaks, the problem has worsened recently?the ratio of revenue loss to GDP has steadily gone up from 6.8% in 2005-06 to 8.5% in 2008-09. Among developed countries, only the UK (12.8%) is worse than India. Among emerging economies, only China has a worse record.

Interestingly, India Inc does better than the average income taxpayer in terms of exemptions on direct taxes. Revenue forgone in corporate tax has gone up from 9.5% of total collections in 2005-06 to 11.4% in 2008-09. Forincome tax, the ratio has decreased from 6.8% in 2006-07 to 6.5% in 2008-09. When average income taxpayers crib that they have it the most unfair, they may have a point after all.

?p.raghavan@expressindia.com