Tax forgone is not a loss of revenue

For promoting export, small-scale industry, education, health care and giving subsidies for the poor and the middle class in transport, exemptions are necessary

I have chosen this subject for writing mainly because a political party is now trying to misguide the public by mentioning in its manifesto that the central government between 2009 and 2013 had forgone Rs 21 trillion of central government tax revenue as tax concessions, which was a plunder by big business houses. I wish to clarify to the readers that this whole concept that tax concessions are not a loss, nor plunder. The economic significance of tax concessions has to be understood with the mind of an economist, and not that of a propagandist.  

Tax exemptions are of several types. The first type is for promoting exports. The second type is for many others. Coming to the aspect of exemptions for export promotions, the basic point is that revenue forgone in the course of export is actually not a loss of revenue. It is necessary to make export competitive in the world market. It is a complete misconception to think that tax forgone in the course of export is actually a loss of revenue. If exemptions and remissions of duty were not given, hardly any export would be possible.  All countries resort to zero-rating, which the WTO permits. If India does not do it, the Indian goods will simply be priced out. So there will be no production for export, as the goods meant for the domestic market have already been produced.  There will be no production of goods which were being produced for export. There would, therefore, be no collection of duty also.  So the duty foregone is not really the cost of export. Customs revenue forgone on account of export promotion scheme wasRs 49,053 crore in 2008-2009 and Rs 43,622 crore in 2009-2010. Central Excise revenue forgone was Rs 1,28,293 crore in 2008-2009 and Rs 1,70,765 crore in 2009-2010. A large part of exemptions is given to special economic zones (SEZs) which boost our country’s export hugely.  

The next most important exemption is for the small-scale industry. From the point of view of employment, the potentiality of export and mass base, the small-scale industry must be encouraged. An extreme view cannot be taken that exemptions for small-scale industries should be abolished. The previous tax regime of excise, sales tax and service tax had different thresholds of concessions, which have now been combined in the present GST regime. Giving a threshold where no tax is levied is a necessary tool for making the economy viable.  

There are certain exemptions for defence, police, educational research and training institute, exhibitions, seminars, expeditions, charitable and social welfare societies, promotional sports, samples, life-saving drugs, re-imports, etc, which have all justification from the economic point of view. The revenue forgone in these cases cannot be called a loss of duty. There are exemptions for giving subsidy for public utilities such as Konkan Railways and Metro Railways, without which the cost of a ticket would be so exorbitant that no passenger could afford it. It is for the poor and the middle class and by no means for the richer class.

What remain are those exemptions which are industry-specific or commodity-specific such as for oil exploration, leather industry, cotton industry, telecom industry and power industry.  They are mostly in Customs.  These exemptions have been continued for too long, completely destroying the simplicity of the tariff.  Distinctions have been made in the same chapter for a similar type of commodities.  Earlier there used to be different rates of duty created by exemptions for similar goods, such as bovine fat and non-bovine fat, paper and paperboard, rubber and resin, ash and dross, prime and waste.  Now that problem has been largely solved because of introducing the concept ‘one rate for one chapter’ for most of the chapters. The problem still continues for so many exemptions, which need to be re-examined.

So the conclusion is that it is not correct to say in general that tax forgone is a loss of revenue.  For promoting export, small-scale industry, education, health care, giving subsidies for the poor and the middle class in transport and other social purposes, exemptions are necessary.  But there should not be too many other exemptions.  As many as possible should be abolished.

The writer is member, Central Board of Excise & Customs (retired)

Email: smukher2000@yahoo.com