Exempt, repent

Now that we know how much tax exemptions cost the exchequer, thanks to this budget providing the first ever estimates, the debate over simplifying the tax code should stop. Importers and industry get the largest giveaways, a fact industry spokespersons protesting the increase in minimum alternate tax should remember. Budget estimates show that the effective corporate tax rate is less than 20 per cent. For companies with profits before tax of Rs 500 crore-plus, the effective tax rate is just above 15 per cent. The other instructive set of numbers come from excise duty collections, which have grown by 11 per cent in 8217;05-8217;06 and is projected to grow at only six per cent in the next fiscal. This, when manufacturing is doing well. It could be therefore that exemptions on the basis of location or size of units are costing too much by way of lost revenues.

Taking the knife to the exemptions regime is also important for tax rationalisation. The single goods and services tax GST promised in the budget needs fewer and, in some cases, lower rates in the interim period. But what is also true is that exemptions are the stuff of political economy 8212; more politics than economics, in fact. So, although the finance minister has said region-based exemptions will be phased out soon, some chief ministers may have other ideas.

Another example: revenue lost on account of personal tax exemptions are relatively small, but one component, rebates on savings instruments, stands out, at Rs 6,568 crore. Now that India8217;s savings rate is supposed to be within kissing distance of 30 per cent of GDP, is it time to review tax incentives on savings? That question will provoke so much political angst that dispassionate analyses become difficult. But, as this budget8217;s estimates show, the cost of passion is high.