Exemption Raj: Beginning of the end?

The numbers are known by now, but they bear repeating: the total revenue foregone through exemption was estimated at Rs 1,58,000 crore for 2004-05. Of this, excise exemptions were Rs 30,000 crore, and nearly Rs 70,000 crore for customs exemptions.

The message is clear: If India needs to be unburdened from the high level of taxes, distortive exemptions have to go too. Obviously, this has evoked mixed reactions from India Inc.

The players which benefit from exemptions are mainly small scale players. ‘‘The removal of these exemptions would hurt this sector in the short term. However, eventually things would even out as the government can use these additional resources to help these industries. Many large sector players have understood this rationale and that’s why you didn’t find any widespread protest against the removal of exemptions for indirect taxes,’’ said Bhavna Doshi, Country Head (indirect taxes), KPMG.

The highest number of excise exemptions are given to the textile industry which has around 90 for its sector, followed by the export sector which has 20 and SSIs which have five. In customs, too, multiple exemptions erode the tax base. There are well over 100 exemptions for customs duties which are further compounded by separate exemption notifications.

However, not many people agree with the government’s proposal to remove all exemptions. ‘‘We understand that the government’s decision to withdraw exemptions would have a positive impact on rationalising tax rates. But how can you deprive benefits to sectors which are bringing you revenues for decades?’’ asks FIEO Chairman O P Garg.

‘‘The government on the one hand wants to remove exemptions on customs and excise duties for exports and on the other hand it is setting up SEZs and EOUs which are enjoying tax benefits. This policy would create disparity amongst players,’’ he added.

But players who are for the removal of exemptions say that with the eliminations of these sops, tax rates could be dropped by half, across the board. But many also believe that exemptions are necessary if certain sectors like the food processing sector are to be nurtured and developed.

‘‘There should be an attempt to streamline taxes and moderate exemptions. However, it is not possible to remove exemptions completely,’’ PriceWaterHouse Cooper’s Prashant Deshpande says.

Some key sectors still enjoying exemptions are small scale industry (SSI), village industry marketed with Khadi and Village Industries Commission (KVIC) assistance, specified goods supplied to various types of public institutions, goods produced without power, cooperative society produced tea, goods produced in the North-East, a number of food items including bread, spices, coffee, fertilisers and ready-made garments. ‘‘An intensive effort is necessary to rationalise exemptions through abolition and merger. Conditions for exemptions must be minimised,’’ said Nihal Kothari, former member of the Task Force on Indirect Taxes headed by Vijay Kelkar.

‘‘The government should target only induced-based exemptions, outlived utilities and exemptions which raise disputes as the excise base is eroded substantially by exemptions,’’ adds a tax analyst.

Experts believe that with the government coming out with a number of schemes for promoting exports it should take a hard look at the duty which it foregoes through exemptions in these schemes and the growth in exports and then chart out its plan for the future.