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Corporate first, individual next: Economic Survey talks of rationalising tax exemptions

Joe C Mathew     February 26, 2016

Senior associate editor Joe C Mathew
If last year's budget talked about removal of exemptions given to the corporate world, the one finance minister Arun Jaitley is about to announce on February 29, could talk about "rationalisation" of some more tax exemptions availed by the "well off" individuals.

This could include the tax saving mechanisms like tax free bonds, public provident funds and small saving schemes that are not restricted to the poor. 

The survey defines the "poor" as those whose consumption is in the bottom three deciles (lowest 30 per cent) of the population, and the "better off" as the rest, except in case of electricity and railways where this classification is different.

The Economic Survey 2015-16 finds uneven distribution of Rs. 100,000 crore subsidies going to the better-off merely on account of six commodities - gold, LPG, kerosene, electricity, railway fares, aviation and turbine fuel (ATF). It talks about national small saving scheme (NSS).

"The total amount given as subsidy is no less than Rs. 91,350 crore not to forget that this is an underestimate of the actual subsidy to the better-off because of the underestimation of the consumption by the rich in the NSS", the survey notes.

It also points out that the subsidies inherent in just the PPF schemes, could take the total subsidy to the well-off to over Rs. 100,000 crore. "This represents substantial leakage from the Government's kitty, and an opportunity foregone to help the truly deserving", the survey says.

The survey notes that it is misleading to characterise these savings schemes as small. "There are at least three types of schemes, only one of which can really qualify as "small, it says.

This first set of "actually small" schemes ranges from postal deposits to schemes for the elderly and women. The second set is of "not so-small" schemes, which includes the most important of all - the Public Provident Fund (PPF). And the third category is "not-small-atall" schemes, which includes tax-free bonds issued by designated public sector companies like IRCL, IIFCL, PFC, HUDCO, NHB, REC, NTPC, NHPC, IREDA, NHAI and others, supposedly to finance infrastructure project, it notes.

The survey says that roughly 62 per cent of total 80C deductions in FY 2013-14 were accounted for by taxpayers with gross taxable income more than Rs 4 lakh (47 per cent by those earning more than R5 lakh).

"These individuals are at the 97.3rd and 98.4th percentiles of the income distribution respectively - hardly "small". While not all 80C deductions are PPF deposits, they appear very sensitive to 80C contribution rules. In 2014-15, when the limit for the 80C deductions was increased by R 50,000 there was an almost a one to one increase in 80C claims for those in the 20 and 30 per cent tax brackets.  The magnitude of this implicit subsidy is about 6 percentage points - approximately R12, 000 crore in fiscal cost terms," survey said.

Though the interest subsidy on tax-free bonds is slightly smaller-about 3.7 percentage points-, because there are no limits on permissible contributions (other than that dictated by the supply of such instruments), the main beneficiaries are large savers who can set aside large amounts, survey says. The average size of the investment in tax-free bonds by the individuals was nearly R 6 lakhs in FY 2013-14, which was six times the total exemption limit under Section 80C, it notes.

Addressing the interventions and rectifying these anomalies may be good not only from a fiscal and welfare perspective, but also from a political economy welfare perspective, lending credibility to other market-oriented reforms, it suggests.

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