TAX EXPENDITURE

There has been a divergence between the official tax rate and effective tax rate in India—defined as the ratio of total tax collected to the aggregate tax base. The divergence occurs mainly on account of tax exemptions. Tax expenditure is also known as revenue forgone. But such forgone taxes doe not necessarily mean that they have been waived off by the government. Better, it should be interpreted as incentives given by the government to promote certain sectors, in absence of which they may not have come up.

High tax expenditure can make the tax system unduly complex and bring in distortions in it. As a result of simplification in the tax system and improvements in tax administration in recent years have brought tax expenditure down—current situation21 is as given below:

(i) 15 per cent for corporate tax (32 per cent of 2007-08).

(ii) 16 per cent for income tax (37 per cent in 2007-08).

(iii) 100 per cent for excise duty (70 per cent in 2007-08). It was at a high

level of 162 per cent in 2009-10 on account of tax concessions announced by the GoI to control inflation.

(iv) 160 per cent for custom duty (92 per cent in 2007-08). It was at a high level of 235 per cent in 2009-10 due to concessions announced for custom duty in wake of controlling prices.

To realise full tax potential the governments needs to limit exemptions and their grandfathering22 together with broadening the tax base. The level of tax expenditure is slated to fall steeply once the proposed GST is operationalised in the country. Under its process of rationalising the corporate tax (cutting it down from 30 to 25 per cent), the government is also aimed at calibrating (phasing out) the various tax exemptions/incentives which exists for the various industries. Its first phase has already commenced in 2016–17.