One Budget innovation that the UPA can lay claim to is the detailing of what tax exemptions cost the exchequer. Until recently, no one outside government really knew how the hundreds of exemptions affected revenue collection. Now, real debates backed by solid numbers can be conducted at last. That means we can ask the UPA why its praiseworthy transparency in data, for example, hasn?t been followed up by action. The UPA government?s Budget figures show the ratio of net tax exemptions to GDP has gone up from 5.1% to 5.9% during its four years in office. Taxes forgone are almost half the tax revenue?a remarkable figure. Just about the only consolation is that India is not unique when it comes to letting tax accruals drop via exemptions. In the world?s most powerful market democracy, the United States, revenue losses from exemptions were an astounding 7.5% of GDP (2004 figures). But there?s no need to follow bad American practices.
Looking within the marco picture of tax exemptions, it appears that the share of exemptions on income tax has doubled, to around 12% of gross tax expenditures, while the share of corporate tax exemptions has come down to 17%, close to half the levels before the UPA was in power. This is undoubtedly a good sign. Corporate tax exemptions are much more abused and mostly much less deserved. The share of customs duty exemptions has also come down, but marginally, and at 44% it is still the largest component of revenues forgone. There?s some logic to customs duty exemptions when duties are high and the list of quantitative restrictions is long. But neither condition applies now. In today?s customs duty matrix, there?s plenty of scope for sharply cutting exemptions. Excise duties also offer many targets for exemption cuts. More so since the share of excise duty exemptions in total revenue foregone has gone up by about 10 percentage points to 26%. One reason for this is the impact of the extension of tax holidays to new states like Uttarakhand and Himachal Pradesh. This has been a highly distortionary regime. If hill states or Northeast states, another magnet for tax exemptions, are to be helped and their topographical ?disadvantages? fiscally neutralised, special grants from finance commissions are a far superior option than tax holidays.
