While subsidies for the poor tend to attract policy attention, the Economic Survey pointed out that small savings schemes and six commodities — gold, LPG, kerosene, electricity, railway fares and aviation fuel — provide a bounty of Rs 1 lakh crore to the well-off.
Since this represents substantial leakage from the government’s kitty, and an opportunity foregone to help the truly deserving, it suggested rectification of the anomalies.
“We highlight that policies that are based on providing tax incentives will, in India, benefit not the middle class but those at the very top end of the income distribution,” it noted. For example, the average income of those in the 20% tax bracket places them roughly in the 98.4th percentile of the Indian income distribution, and the corresponding figure for the 30% tax bracket is the 99.5th percentile.
Addressing the interventions and rectifying these anomalies might be good not only from a fiscal and welfare perspective, but also from a political economy welfare perspective, lending credibility to other market-oriented reforms. It noted that most small savings schemes such as postal deposits in the “actually small” category are taxed while the PPF, which is a “not-so-small” scheme is tax free, benefiting the rich largely.
Similarly, the rich consume most of gold (the top 20% of population account for roughly 80% of total consumption) and the poor spend almost negligible fraction of their total expenditure on it. Yet gold is only taxed at about 1-1.6% (states and Centre combined), compared with tax of about 26% for normal goods.
In the case of subsidised LPG, 91% of the subsidy are accounted for by the better-off. They account for 50% of the kerosene given under public distribution system. Similarly, the concessional tax on ATF benefits those who travel by air, not the poor.
The government spends nearly 4.2% of GDP subsidising various commodities and services. In at least one area – corporate taxes – the government has recently taken decisive action, by identifying and quantifying exemptions amounting to about Rs 62,000 crore and announcing a clear path for phasing them out.
A move to goods and service tax (GST) would also eliminate leakages due to rationalisation of indirect tax exemptions estimated to cost Rs 3.3 lakh crore. “These commendable efforts could be extended to other areas where the poor and vulnerable are not exposed,” the Survey suggested.
Subsidy story
* Economic Survey pointed out that small savings schemes and six commodities – gold, LPG, kerosene, electricity, railway fares and aviation fuel – provides a bounty of R1 lakh crore to the well-off
* Most small savings schemes such as postal deposits in the “actually small” category are taxed while the PPF, which is a “not-so-small” scheme is tax free, benefiting the rich largely
* Rich consume most of gold and the poor spend almost negligible fraction of their total expenditure on it. Yet gold is only taxed at about 1-1.6%
