Tax exemptions and incentives for the corporate sector continue despite reduction in corporate tax rates
Quite often it is argued by mainstream economists that a sizeable chunk of the Union Budget every year is wasted because the Government spends that on food and fertiliser subsidies. The burgeoning size of these two subsidies relative to the entire budget as well as the gross domestic product (GDP) is often used to build the argument that economic as well as environmental sustainability of the country is at stake on account of them (apart from subsidies that are provided by states such as power subsidy, etc). However, despite the availability of official data, revenue losses to the exchequer because of tax reliefs and incentives provided to the corporate sector and the non-corporate entities (i.e. income taxpayers) is hardly noticed and hence less mentioned by media commentators and financial pundits.
As a result of various kinds of tax incentives to taxpayers, including specific tax rates, exemption, deductions, rebates, deferrals and credits, the state foregoes revenue. Hence, these fiscal measures have revenue impact and can be viewed as indirect subsidies to preferred taxpayers, also referred to as “tax expenditures” in official nomenclature. The concept of revenue foregone first came into being in the United States and Germany during the 1960s and was initially revealed in a separate chapter in the USA Budget 1968.
As part of transparency in tax policy and budgeting, the Government of India started disclosing the revenue impact of tax incentives under the Central Tax System since Union Budget 2006-07. An attempt has been made in the present news alert to draw the attention of the readers to various forms of tax subsidies, incentives and rebates, which are enjoyed by the corporate sector and the income taxpayers.
Revenue impact of major tax incentives for corporate taxpayers
During the nine years spanning between 2011-12 and 2019-20, the Union Government gave various types of tax incentives and rebates (also termed as indirect subsidy) to the corporate taxpayers that led to revenue foregone amounting to Rs. 7.18 lakh crore. Please consult table-1. The Statement of Revenue Impact of Tax Incentives under the Central Tax System: Financial Years 2018-19 and 2019-20, which we get from the Union Budget 2021-22 documents, indicate that larger companies are availing higher deduction and incentives as compared to smaller companies. For example, the average effective tax rate of companies with Profit before Taxes (PBT) greater than Rs. 500 crore was 25.91 percent in 2018-19, which is lower than all the companies having PBT below Rs. 500 crores.
Source: Statement of Revenue Impact of Tax Incentives under the Central Tax System: Financial Years 2018-19 and 2019-20, Annex-7, Union Budget 2021-22, please click here to access
*Statement of Revenue Impact of Tax Incentives under the Central Tax System: Financial Years 2018-19 and 2019-20, Annex-7, Union Budget 2020-21, please click here to access
Statement of Revenue Impact of Tax Incentives under the Central Tax System: Financial Years 2017-18 and 2018-19, Annex-7, Union Budget 2019-20, please click here to access
Statement of Revenue Impact of Tax Incentives under the Central Tax System: Financial Years 2016-17 and 2017-18, Annex-7, Union Budget 2018-19, please click here to access
Statement of Revenue Impact of Tax Incentives under the Central Tax System: Financial Years 2015-16 and 2016-17, Annex-13, Union Budget 2017-18, please click here to access
Statement of Revenue Impact of Tax Incentives under the Central Tax System: Financial Years 2014-15 and 2015-16, Annex-15, Union Budget 2016-17, please click here to access
Statement of Revenue Impact of Tax Incentives under the Central Tax System: Financial Years 2013-14 and 2014-15, Union Budget 2015-16, please click here to access
Revenue Foregone under the Central Tax System: Financial Years 2012-13 and 2013-14, Union Budget 2014-15, please click here to access
Revenue Foregone under the Central Tax System: Financial Years 2011-12 and 2012-13, Union Budget 2013-14, please click here to access
Note: The Union Budget 2020-21 documents give revenue foregone figures associated with corporate tax incentives and income tax incentives in 2018-19* (yellow shaded cells in table-1). However, those differ from the revenue foregone figures related to corporate tax incentives and income tax incentives in 2018-19, which is provided by Union Budget 2021-22 documents. In our own calculation, we have used the latter and not the former.
Please click here to access the data in Google spreadsheet
It must be added here that the practice of giving tax concessions to the large corporate entities has continued despite the reduction in corporate tax rates in recent years. For example, corporate tax rates were trimmed from 30 percent to 22 percent in September, 2019, two months after the Union Budget 2019-20 (final) was presented in July 2019. This fiscal measure partly resulted in fall in overall tax collection in 2019-20. As per the Government's own calculations, the total revenue foregone in 2019-20 due to the reduction in corporate tax rate and other relief was estimated at Rs. 1,45,000 crore for that year.
In his Union Budget 2015-16 speech, the earlier Finance Minister Shri Arun Jaitley had said that he wished for reducing the rate of corporate tax rate from 30 percent to 25 percent over the next four years along with rationalisation and removal of various kinds of tax exemptions and incentives for corporate taxpayers, which incidentally lead to a large number of tax disputes, litigations and loss of revenue aside from the presence of pressure groups. He stated in his budget speech that the effective collection of corporate tax was around 23 percent despite the basic rate of corporate tax being 30 percent in India.
Although the corporate tax rate has been reduced over the subsequent years since 2015-16 (for example, in the Union Budget 2017-18, the Government slashed the corporate tax rate to 25 percent for companies whose turnover was less than Rs. 50 crore in financial year 2015-16), the average annual growth rate of revenue foregone due to tax concessions to the corporate sector remained around 13.6 percent between 2015-16 and 2018-19.
The corporate tax cut in September 2019 lowered financial resources available for spending on programmes and schemes, which have been already committed in the Union Budget 2019-20. After the corporate tax cut, the Union Government is left with meagre financial resources that could have been used for counter-cyclical measures against economic slowdown. Although corporate tax rate has been cut to make the country a globally competitive and a favoured destination for foreign direct investment, research studies indicate that foreign investment is mainly determined by market size, skilled human resources and efficient infrastructure.
Revenue impact of major tax incentives for income taxpayers
The tax revenue foregone due to income tax incentives for non-corporate sector, i.e., Firms/ Association of Persons (AOPs)/ Body of Individuals (BOIs) during the period from 2011-12 to 2019-20 is worked out to be Rs. 50,680.99 crore. Similarly, the tax revenue foregone due to income tax incentives for individuals/ Hindu Undivided Family (HUF) taxpayers during the period from 2011-12 to 2019-20 is found to be Rs. 5.47 lakh crore. Kindly see table-1.
Therefore, the total tax revenue foregone owing to income tax incentives for non-corporate sector, i.e., Firms/ Association of Persons (AOPs)/ Body of Individuals (BOIs) as well as individuals/ Hindu Undivided Family (HUF) taxpayers between 2011-12 and 2019-20 is computed to be Rs. 5.98 lakh crore.
The gross tax revenue foregone due to various types of direct tax incentives/ rebates/ concessions during the period from 2011-12 to 2019-20 is found to be Rs. 13.16 lakh crore.
Revenue impact of major tax incentives given for customs and excise duties
Since there has been a change in methodologies in estimation of tax exemptions provided under customs and excise duties since 2015-16, so we have not taken into account the revenue impact of indirect tax incentives under the Central Tax System.
It is worth noting that the revenue foregone as a percentage of GDP amounted to 6.6 percent in 2005-06, 6.7 percent in 2006-07, 6.8 percent in 2007-08, 8.1 percent in 2008-09, 7.4 percent in 2009-10, 5.9 percent in 2010-11, 6.1 percent in 2011-12, 5.7 percent in 2012-13, 4.9 percent in 2013-14 and 4.5 percent in 2014-15. The amount of revenue foregone reached its peak in financial year 2008-09 (when the global financial meltdown happened) but has since then seen a steady decline. Following the change in methodologies in estimating tax exemptions provided under customs and excise duties, the total revenue foregone fell by 49 percent in 2015-16, and revenue foregone as a percentage of GDP became 2.1 in 2015-16 and 2.0 in 2016-17.
Another reason behind the decline in revenue foregone between financial years 2015-16 and 2018-19 is the introduction of Goods and Services Tax (GST) in 2017-18, which subsumed most indirect taxes. With the introduction GST in 2017-18, tax incentives given under the indirect taxes ceased to exist. Revenue foregone as a percentage of GDP stood at 1.4 percent in each of the years between 2017-18 and 2019-20.
Please note that the revenue impact of tax incentives was laid before Parliament for the first time during Budget 2006-07 as Annex-12 of the Receipts Budget by way of a statement of Revenue Forgone. It was well received by all quarters and gave rise to a constructive debate on the entire gamut of issues concerning fiscal policy. It also lent credence to the Government's intention of bringing about transparency in the matter of tax policy and tax expenditures. The second edition of this statement was placed before Parliament during Union Budget 2007-08 by way of Annexure-12 of the Receipts Budget and also by way of a separate budget document titled "Statement of Revenue Forgone". Thereafter, it was placed every year before Parliament during Budget from 2008-09 to 2014-15. In the Union Budget 2015-16, it has been termed more appropriately as the "Statement of Revenue Impact of Tax Incentives under the Central Tax System", since what is actually being analysed is the revenue impact. However, it was not part of the Receipt Budget in that year. In Budget 2015-16, it was made part of Receipt Budget as Annexure-15, while in the Union Budget 2017-18, it was Annexure-13. In the Union Budgets 2018-19, 2019-20 and 2020-21, it was part of Receipt Budget as Annexure-7.
Food and fertiliser subsidies
During the period from 2011-12 to 2019-20, the Union Government spent Rs. 9.27 lakh crore on food subsidy and Rs. 6.31 lakh crore on fertiliser subsidy. In total, the Union Government spent 15.58 lakh crore on both these subsidies between 2011-12 and 2019-20. Please check table-2.
Table 2: Food and Fertiliser Subsidies given by Union Government (in Rs. crore)
Source: Expenditure of Major Items, Union Budget 2021-22, please click here to access
Expenditure of Major Items Union Budget 2020-21, please click here to access
Expenditure of Major Items Union Budget 2019-20, please click here to access
Expenditure of Major Items Union Budget 2018-19, please click here to access
Expenditure of Major Items Union Budget 2017-18, please click here to access
Non-Plan Expenditure by Broad Categories, Expenditure Budget Vol. I, 2016-2017, Statement-4, please click here to access
Non-Plan Expenditure by Broad Categories, Expenditure Budget Vol. I, 2015-2016, Statement-4, please click here to access
Non-Plan Expenditure by Broad Categories, Expenditure Budget Vol. I, 2014-2015, Statement-4, please click here to access
Non-Plan Expenditure by Broad Categories, Expenditure Budget Vol. I, 2013-2014, Statement-4, please click here to access
Note: Please click here to access the data in Google spreadsheet
Readers should be cautioned here that the dues related to fertiliser and food subsidies in the previous years have been cleared in 2020-21 and some more would be cleared in 2021-22. Hence, the year-wise figures for food subsidy and fertiliser subsidy between 2011-12 and 2019-20 in table-2 do not reflect the actual extent of support given by the Union Government. To know more about this issue, please consult our previous news alert entitled Fiscal transparency jacks up ‘expenditure’ numbers in the Union Budget 2021-22. It is not prudent to draw any conclusion about the extent of food and fertiliser subsidies given by the Union Government during the period from 2011-12 to 2019-20 from table-2.
Aside from food and fertiliser subsidies, subsidised credit, farm debt waivers and other indirect supports are provided to the farm sector by the Union and State Governments. The corporate sector too receives various forms of indirect support by the State Governments (like making available land at cheaper rates, dilution of environmental and labour norms, etc.), which we have not discussed in this news alert. Discretionary favours to both farm and corporate sectors still exist on account of political and financial motives, which requires a separate political economic analysis.
In the context of food and fertiliser subsidies given by the Union Government, the World Trade Organisation's (WTO) Agreement on Agriculture (AoA) needs to be discussed here briefly. The WTO’s AoA, which was negotiated during the Uruguay Round (1986-1994), came into effect from 1st January, 1995. As per the provisions of that agreement, the developed countries were to complete their reduction commitments within 6 years, i.e. by the year 2000, whereas the commitments of the developing countries like India were to be completed within 10 years, i.e. by the year 2004. The AoA brought about new rules pertaining to market access, domestic support (subsidies), and export subsidies/ competition for developing countries like India as well as developed and least developed countries.
Under the WTO AoA, a developing country is required to not only convert non-tariff barriers like quotas, variable levies, minimum import prices, discretionary licensing, state trading measures, voluntary restraint agreements, etc. into tariff equivalents under a process called tariffication, it is also required to reduce tariffs by 24 percent from tariffication over the next 10 years for allowing market access.
Aside from that, the developing countries which so far have been providing Amber Box subsides i.e. trade-distorting subsidies, are required to move away from them and shift towards Green Box subsidies, which supposedly don’t distort free trade. Under the WTO AoA, the developing countries are required to limit their Aggregate Measure of Support (AMS), which is covered under Amber Box subsidies, within 10 percent of the total value of the concerned product (de minimis level). In addition, non-product specific support, which is less than 10 percent of the value of total agricultural production in case of developing countries, is exempt from reduction. Please note that the non-product specific subsidy is calculated by taking into account subsidies given for inputs like fertilizers, water, seeds, credit and electricity. Presently, India is under immense pressure from countries like the United States and Canada for providing farm support (like minimum support prices or input subsidies) and running food security programmes (like distribution of subsidised foodgrains through Public Distribution System under the National Food Security Act). Despite the opposition at the WTO to India’s public stockholding of foodgrains, the country has got a temporary reprieve through a “peace clause”.
For domestic support policies, subject to reduction commitments, the total support given in 1986-88, measured by the Total Aggregate Measure of Support (total AMS), should be brought down by 20 percent in developed countries and 13.3 percent in developing countries. Reduction commitments refer to total levels of support and not to individual commodities. Policies which amount to domestic support both under the product specific and non-product specific categories at less than 5 percent of the value of production for developed countries and less than 10 percent for developing countries are also excluded from any reduction commitments.
The Ministry of Commerce and Industry website mentions that Special and Differential Treatment provisions are also available for developing country members. These include purchases for and sales from food security stocks at administered prices provided that the subsidy to producers is included in calculation of AMS. Developing countries are permitted untargeted subsidised food distribution to meet requirements of the urban and rural poor. Also excluded for developing countries are investment subsidies that are generally available to agriculture and agricultural input subsidies generally available to low income and resource poor farmers in these countries.
Union Budget, various years, https://www.indiabudget.gov.in/
Union Budget Speech 2017-18 delivered by Shri Arun Jaitley, 1 February, 2017, please click here to access
Union Budget Speech 2015-16 delivered by Shri Arun Jaitley, 28 February, 2015, please click here to access
Video: Union Budget 2015-16 Speech by Finance Minister Shri Arun Jaitley, please click here to access
Press release: Corporate tax rates slashed to 22% for domestic companies and 15% for new domestic manufacturing companies and other fiscal reliefs, Ministry of Finance, Press Information Bureau, dated 20 September, 2019, please click here to access
An Introduction: WTO Agreement on Agriculture, Ministry of Commerce and Industry, please click here to access
Explanation: Domestic Support to Agriculture, WTO, please click here to access
Budget in the Time of the Pandemic: An Analysis of Union Budget 2021-22 -Centre for Budget and Governance Accountability (CBGA), released in February, 2021, please click here to access
Promises and Priorities: An analysis of Union Budget 2019-20 -Centre for Budget and Governance Accountability (CBGA), please click here to access
News alert: Fiscal transparency jacks up ‘expenditure’ numbers in the Union Budget 2021-22, Inclusive Media for Change, Published on Feb 4, 2021, please click here to access
News alert: Size of tax rebates is large as compared to spending by agricultural & rural development ministries, Inclusive Media for Change, Published on Feb 6, 2018, please click here to access
The double standards in support to farmers stir -Rohit Parakh, The Hindu Business Line, 3 March, 2021, please click here to access
Prophetic! Arun Jaitley’s big promise fulfilled within deadline – Here’s what he said -Rajeev Kumar, Financial Express, 20 September, 2019, please click here to access
Union Budget 2017: Did Jaitley just prove his critics right on corporate tax exemptions? -Seetha, Firstpost.com, 4 February, 2017, please click here to access
Image Courtesy: Doordarshan National YouTube Channel, please click here to access
Tagged with: Aggregate Measure of Support Agreement on Agriculture Corporate Sector Corporate Tax Corporate Tax Rate Corporate Taxpayers Farm Sector Farm Subsidies Farm Support Fertiliser Subsidy Fertilizer Subsidy Food Subsidy Income Tax Income Taxpayers Indirect Subsidy National Food Security Act NFSA Revenue Foregone Tax Exemptions Tax Incentives Tax Rebate World Trade Organisation WTO