According to a working paper on Raising the tax ratio by reining in the tax-breaksan agenda for action, prepared by Dr Amaresh Bagchi, Ms R Kavita Rao and Ms Bulbul Sen recently, Dr Chidambaram can substantially raise tax-GDP ratio by removing tax incentives and abolishing exemptions that have outlived their utility or are creating distortions in the economy.
Dr Bagchi is professor emeritus of the NIPFP. Ms Rao is senior fellow and Ms Sen is principal consultant, on deputation to NIPFP from the Indian Revenue Service.
According to the NIPFP study, the small-scale industries (SSI) sector could yield an additional revenue of Rs 12,560 crore, followed by exports at Rs 10,000 crore, agriculture sector at Rs 10,000 crore, housing at Rs 8,000 crore, charities Rs 8,000 crore, exempted commodities Rs 4,000 crore and exempted area-based units Rs 2,000 crore. To put it in perspective, the Union government is losing Rs 150 crore every day because of the tax exemptions that may be dispensed with.
Referring to the SSI sector, the paper regretted that the transitional promotional measures have not ended even after half a century. The revenue foregone to promote SSI sector was estimated at Rs 11,361 crore during 2004-05. The figure is expected to go up unless steps are taken to do away with unnecessary exemptions.
Similarly, the tax holidays being enjoyed by exports and special economic zones (SEZs), the paper says, will cost the exchequer dearly without yielding commensurate benefits. The potential loss of revenue has been estimated at Rs 10,000 crore. Though taxing agricultural income is an emotional issue, the sector can yield annual revenue of Rs 10,000 crore. The actual benefits, however, will be much more as assessees will not be able to camouflage non-agriculture income with agriculture earnings.
As far as tax incentives for the housing sector are concerned, the NIPFP paper made a case for reconsidering generous tax incentives. The paper advocated the need for gradually phasing out the housing sector tax incentives which cost the exchequer as much as Rs 8,000 crore per annum.
Tax exemptions for charities have remained quite uncharitable for the exchequer. The Shome Committee pegged the revenue cost of exemptions accorded to charitable trusts at Rs 5,700 crore for 2001-02. The NIPFP study has placed the revenue gain from tightening of tax provisions for charitable trusts at Rs 8,000 crore.
The NIPFP paper has also suggested that the ambit of taxed services should be expanded by introducing a small negative list. All services which are not in the list should be subjected to service tax. As far as customs is concerned, it said, there is no case for providing incentives and concessions, barring items for which India is committed to provide exemption as per the Information Technology Agreement, 1996.