Blaming India Inc’s lobbying for tax exemptions, Prime Minister’s Economic Advisory Council chairman Bibek Debroy has said eliminating such exemptions can help increase the tax-to-GDP ratio and hoped the government panel tasked with reviewing the Income Tax Act will look into this aspect. He, however, was quick to add that a “consensus” is yet to evolve on the subject and any announcement is unlikely in the next Budget. Debroy claimed revenue worth 5 per cent of GDP is lost to exemptions and if these exemptions are eliminated, the tax-to-GDP ratio will be 22 per cent. “Until we reduce the exemptions, the tax-to-GDP ratio is not going to go up, nor the compliance costs going to come down,” he told a seminar at the IGIDR here today. “There is tax evasion, but what happens more often is not tax evasion but tax avoidance. Tax evasion is illegal, but tax avoidance is perfectly legitimate because of the arrays of exemptions that are allowed,” he said. On the critical question on when can there be a move to eliminate tax exemptions, he said the six-member task force set up to overhaul the 50-year-old Income Tax Act will address the issue.
“One of the reasons behind setting up this is to look at the Income Tax Act, which in any case ought to be looked at, and to address the issue of exemptions. But will the removal of exemptions on the direct tax side be taken care if in the next Budget, I don’t think we have enough of consensus,” the noted economist said. Debroy said hectic lobbying by the industry should be blamed for the inclusion of exemptions in the first place. “On the direct tax exemptions, I don’t think you should blame the politicians and the bureaucracy. If you may want to blame someone, it should be the industry. Why else do you think they lobby this time of the year? Their central argument is remove exemptions for everyone else, but retain those for me.”
He said the issue of exemptions was first mentioned by Jaitley in the 2016 Budget along with a decision to reduce corporate tax in a phased manner. Debroy conceded that GST is not perfect because of multiple rates and exemptions, but stressed that the this is a step in the right direction. “Yes, there are too many rates. But those too many rates are better than the number of rates that used to exist earlier. Yes, there are exemptions, but the exemptions are fewer than what it used to be earlier,” he said. On crude prices, he said they are unlikely to go up drastically in the near future.
He said there are a slew of areas where the changes in social infrastructure are visible like with financial inclusion. After the success of Jan Dhan Yojana, the debate should now be around how the people can use these accounts and deliver financial products that suit them, he said. The quality of data collection needs an improvement, he said, adding there is no credible way through which anyone can get figures on unemployment. Admitting that skilling is a gap that needs to be addressed urgently, he said some studies which say the demographic dividend is working for the country and peg the contribution of the youth to GDP growth at up to 1 percentage point.