Half of what taxman collects, he gives away: In Budget, a revelation and a revolution?

That means, for small state liberals, the debate about tax rates can be reopened. That means, for big state socialists, a sharp revision of their thesis that more taxes are needed. That means, for simple tax code advocates, a confirmation beyond their wildest expectation that exemptions are bad news.

And that means, for all taxpayers, especially the big fish, a humbling admission that perhaps they have been grousing too much about paying taxes—half of what the taxman takes he gives back.

This calculation is possible because Para 174 introduces, for the first time, the concept of “revenue foregone”. This is a measure of how much revenue the state loses because of incentives, subsidies and concessions—in one word, exemptions—in the tax structure.

Calculations show that the biggest exemptions, by total revenue lost, are given on customs duties. Revenue losses on account of corporate tax exemptions are the next on the list, followed by those from excise tax exemptions. Revenue losses from exemptions on personal income tax are much smaller. The policy implications are fairly clear: start by simplifying indirect taxes and doing away with corporate give aways.

Easily recognisable examples of tax exemptions under all these heads will include: From the personal tax code—tax rebates for senior citizens and women and those on savings instruments. From the corporate tax code—tax deductions allowed to units in special economic zones and those on depreciation (wear and tear of machines); also deductions on donations to charities and political parties. From the indirect (excise and customs) tax code—excise tax concessions given to firms operating in “special regions” like J&K, the North-East and Himachal Pradesh. Customs duty concessions are an A to Z affair, applicable to almost a hundred commodities, from animals to zinc.

The total number of exemptions across all tax categories is huge. And as Annexure 12 of the Receipts Budget—user guide: page 45 of the yellow booklet in the budget document package—calculates, so is the amount of revenue lost.

The calculations are for 2004-2005, the last year for which full figures are available (the 2005-2006 financial year hasn’t ended). Annexure 12 makes it clear that being a pioneering exercise, both methodology and coverage offer scope for improvement.

But even the first ever attempt to measure revenue foregone gives us the figure of Rs 158661 crore. Since the total tax revenue (revised estimates) of 2004-2005 was Rs 306020.50 crore, the proportion of revenue foregone because of tax exemptions works out to 51.85 per cent. Apply, as a rough and ready measure, the same proportion to this year’s budget figures.

Chidambaram has assumed that he will get total tax revenue of Rs 442153 crore for 2006-2007. Assuming that exemptions will eat away revenue to the same extent as they did in 2004-2005, we get a ballpark (rounded off) figure of Rs 229256 crore. Therefore, the amount that will be given away in exemptions is bigger than the fiscal deficit projected for 2006-07: Rs 148686 crore.

Now you know why Para 174 can start a revolution.