Budget 2012: Why not withdraw tax breaks to companies?

By Yogi Aggarwal

The budget presented by Pranab Mukherjee  on 16 March was notable for having had to be worked out under difficult circumstances.  A government under siege from one of its own allies and under threat of being reduced to a minority does not have many options.

It is to Mukherjee’s credit that he made the best of his limited options and tried to present a budget that tried to continue with government spending on programmes and subsidies for the poor. He has promised to limit the fiscal deficit to 5.1 percent despite it having vastly overshot last year’s target of 4.6 percent to reach an estimated 5.9 percent.

Is the deficit target credible? The answer to that question will determine whether we go in for another year of high inflation and low growth or whether we are able to make it comfortably to the growth level of recent years.

It’s about time the middle class stopped expecting protection, especially since it is more prosperous than it ever was in the past. Reuters

Though the finance minister has brought back excise duties to the level they were before the 2008 crisis much more also needs to be done than has been announced to see that the deficit stays at just 5.1 percent and does not overshoot the target.

Everyone agrees that there has to be a more forceful cut in subsidies. What is little realised is that tax exemptions given over the years lead to a far greater loss to the exchequer than subsidies and these would have to be rationalised, and many of them cut so that the deficit is controlled.

Last year the gross subsidy bill was Rs 217,000 crore, of which the major subsidies of food, fertiliser and petroleum amounted to Rs 209,000 crore, up 27 percent from the previous year’s  Rs 165,000 crore. This was largely due to an increase in petroleum and fertiliser subsidies by Rs 49.000 crore because of the increase in crude prices.

The only sensible way to handle this is what is done all over the world. Petrol, diesel and LPG prices are directly linked to the price of crude. For a short time during the NDA government, this was also the practice here but now it seems to have been discarded for fear of the vocal middle-class, including many of the readers of this website, whose interests are defended by the media and most political parties.

It’s about time the middle class stopped expecting protection, especially since it is more prosperous than it ever was in the past.

What is needed is that subsidy for petroleum products should be fixed per unit volume, and then let the prices change every week along with the change in international oil prices. At present, the underrecoveries on petroleum products are Rs 12 per litre of diesel, Rs 29 per litre of kerosene and Rs 440 per cylinder of LPG.  These could easily be lowered to cut subsidies.

Though this year the finance minister has provided for crude prices to be around $ 115 a barrel, these are likely to be higher and beyond the government’s control.  Any rise in crude oil prices beyond this level would again throw subsidy calculations out of gear unless the amount of subsidy per litre of kerosene or diesel or per cylinder of LPG is fixed.

This should be the policy even if diesel prices rise in tandem with international ones and lead to inflation. At least we will know where the inflation is coming from rather than go into denial mode.

The expenditure on schemes like NREGA or the food security bill is another matter. They put money or foodgrains in the hands of those living at subsistence levels. Apart from having the effect of helping lift such families from poverty, they lead to higher consumption of basic goods. This is good for the economy as it puts money back into circulation into company sales.

One valuable budget proposal was to double customs duty on gold imports from the ridiculously low 2 percent to 4 percent. Gold imports, at an astounding $50 billion, are the second largest imports into the country after oil, and twice the value of machinery imports.  This one step alone would give around Rs10,000 crore annually to the government, and could easily be raised further without any increase in smuggling since the reward for it would be less than the risk faced.

A little known fact relates to the revenue foregone by government from companies because of various deductions offered. A document released along with the budget papers, “Revenue forgone under the Central Tax System: Financial Years 2010-11 and 2011-12” makes some interesting revelations.

The benefit to companies from deductions in customs duties is an amazing Rs 270,131 crore, which is nearly twice the actual customs duty collected of Rs 153,000 crore. Similarly the excise duty foregone is Rs 212,167 crore, some 50 percent more than the Rs 146,000 collected.

In direct taxes paid by companies and individuals, the revenue foregone is Rs 93,612 crore, while corporate tax payable was Rs 228,158 crore. The total revenue foregone is Rs 575,910 crore, more than twice the subsidy bill of Rs 217,000 crore.

Some of the deductions offered were probably necessary at the time they were introduced, but the finance ministry could surely trim them down. These should be easier to cut than subsidies. Unless, that is, it fears the corporate sector even more than it does the middle class.

Updated Date: Mar 17, 2012 15:26 PM

Also See