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If one talks about the priorities of the present government, probably the top most priority of the present government is defence. Not only that defence takes away around 14 percent of the total budget expenditure estimated for the year 2009-10 (See figure-3), over the last year it has registered an increase of over 23 percent from Rs. 114600 crores in 2008-09 RE to Rs. 141703 crores in 2009-10 BE. On the other hand, the allocation in critical sectors such as rural employment registered a modest increase of around 6 percent over last year and allocations for agriculture and allied activities has registered a decline of over 23.3 percent compared to last year figures.

In the current year, the Tax GDP ratio continued the declining trend of the last year. The gross tax GDP ratio has declined from around 12.6 percent during 2007-08 to 10.9 percent in 2009-10 BE. While the government and many other quarters in the policy circles cite continuing economic slowdown as a major reason behind this the real factor behind such a decline is the increased tax exemptions the government has offered to different entities, especially in the customs and excise duty front in the name of tax incentives. 

Figure-3

Priorities in Government Spending (Rupee Goes to)

Table-2

Declining Tax Efforts in 2009-10

Between 2007-08 and 2008-09, the amount of revenue foregone has increased from around 2.8 lakh crore rupees to 4.2 lakh crore rupees per annum. In the Budget 2009-10 laid before the parliament on 6^th July, the Finance Minister has estimated a revenue loss of around Rs. 462512 crores in 2008-09 towards various kinds of exemptions in the central tax system.  Considering the export related credits of around Rs. 44417 crore, the net tax revenue foregone due to the exemptions and other forms of concessions amount to Rs. 418095 crores for the year. This is almost 7.9 percent of GDP and around a lakh crore rupees more than what the government has proposed this year as planned expenditure.  The UPA government over its last tenure has foregone more than Rs. 13082 billion on account of such floodgates in the central tax system. This huge sum of money is around ten times more than the total outstanding external debt of the country as on 31^st March 2009 and is more than sufficient to finance all developmental programmes run by the government.    As can be seen in the table-3, the amount of tax revenue foregone during the last UPA regime has increased from around Rs. 158661 crore in 2004-05 when it assumed power after the 2004 verdict to the present level of more than 4 lakh crore rupees. As a percentage of GDP, it has gone up from around 5 percent in 2004 to around 8 percent in 2009.

Table-3

Total Tax Revenue Foregone in the Central Tax System during last UPA Regime

The Government refers to lack of resources as a major inability to finance several developmental activities including its universalisation of Elementary Education (UEE) programme. It has even taken resort to strategies like education cess on all kinds of taxes collected through central tax system to finance the UEE. In the policy circles, proposals still continue to do away with the subsidies by quoting these as unproductive expenditure. This year also, the government has proposed a 14 percent cut in major subsidies from Rs. 129243 crores in 2008-09 RE to Rs 111276 crores in 2009-10 BE.

The proponents of neoliberal policies consider subsidies as a leakage in a manner they consider taxes as resource mobilizing tool. In India, inequality in income and wealth is widespread. As per the 63^rd round survey of NSS, around 65 percent people in rural areas live on less than Rs. 23 a day. Under such situation, tax and subsidies can be used as effective tools for providing economic distributive justice by diverting resources from the rich and making provisions for the poor. Unfortunately, the government by foregoing tax revenue and by consistently trying to reduce subsidies have only exposed it pro –rich agenda. It is worth mention here that the amount of tax revenue foregone in the year 2008-09 is more than three times the amount government gave towards all kinds of subsidies.

A deeper analysis of the revenue foregone statement of the government reveals further disappointing issues. Around 49 percent of all revenue foregone is accounted in customs duty and 28 percent in the excise duty. Needless to say that most of the items on which these exemptions are given are not for the commons. Exemptions in personal income tax and corporate income tax account for around 9 percent and 15 percent respectively of the total revenue foregone. The present tax regime is particularly discriminatory in favour of big business and is unduly harsh on the small scale sector as far as burden of tax is concerned. The effective tax rate (ETR) on small enterprises with an estimated profit before tax (PBT) in the range of Rs. 0-1 crore is more than 24 percent compared to less than 22 percent ETR for companies with a PBT  more than Rs. 500 crore.

During last one and half decades, issues related to loss making public Sector undertakings (PSUs) and their privatization had been a major debate in the policy circles. However, when one compares the PSUs with the private enterprises one should not close eyes to the discriminatory treatment of the government does in favour of the latter. The effective tax rate of PSUs is around 26 percent compared to just 21 percent in case of the private enterprises. In the manufacturing sector, the effective tax rate for sugar sector is as low as 3 percent compared to around 25 percent tax rate on flour and rice mills. In trading, the ETR for retailers is 29 percent compared to 23 percent for chain stores. In service sector, the ETR is only 12 percent for software development agencies compared to 30 percent for travel agents and tour operators. In the financial services sector, the stock brokers enjoy an ETR of 23 percent compared to 29 percent for those engaged in regular banking business.

Table-4

Item wise Leakages in Central Tax System

Apparently the purpose of these exemptions and incentives has been to attract investment, retain the investor confidence and to promote employment generation in the economy. But in reality, investment would flow in only when there is a possibility of profit and employment will be offered only when there is a genuine rationale for a new employment. If one considers the employment generation impacts of such tax exemptions, during the year 2005-06 only around 5 lakh new employments were generated in the organized sector accounting for around Rs. 40 lakh per annum of tax revenue foregone per job created. From any logical ground, a country like India can not afford to generate such costly employment through tax exemptions and incentives to the rich and the affluent.

Liberalization process has created such a situation where the governments allover the world are resorting to tax concessions and other forms of tax incentives to retain investor confidence to attract capital flow in to the country. However, it should not be forgotten that under a crisis situation the world economy is currently facing, no amount of tax exemptions can sustain the investor confidence until and unless the aggregate demand is not boosted in the economy. An easing out of the demand constraint will automatically boost investment. Unfortunately, instead of boosting the aggregate demand in the economy, the government is trying to boost the investment through these exemptions. Incentives of exemption to individual tax payers may motivate them to invest a part of their income in certain projects specified for exemptions but will not be sustainable as the number of these tax payers is less. In an economy where more than 90 percent population in rural and urban areas live on less than Rs. 39 and Rs. 85 per day as per the NSS 63^rd round, the only way to boost the demand is through increasing the purchasing power in the hands of the majority. This is possible through mass employment programmes and expansion of subsidies to more number of people and not through tax concessions to the rich. In the present context, exemptions are nothing but foregoing public resources for the welfare of the rich. The government should make urgent efforts to reverse this trend of increasing tax exemptions to the corporate and the rich and focus on programmes such as NREGS and universal public distribution system if it is really interested in dealing with the adverse impacts of the world economic crisis in a significant manner. 

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