life in financial markets: tax revenues foregone

Government's tax incentives valued 12 per cent higher this year

Special tax rates, exemptions, deductions, rebates, deferrals and credits is estimated to cost the central government a total of Rs 5,81,872 crore in the current financial year (FY12), 12.5 per cent more than it did in the previous year (FY11). This is revealed in a FC R analysis of the statement of revenue foregone under the central tax system which was released as a part of the budget documents on Friday. The analysis encompasses the tax incentives given in four major revenue heads, personal income tax, corporate income tax, excise duties and customs duties.

The government's statement of revenue foregone, while putting a value to various tax incentives, states this is done "assuming that the underlying tax base would not be affected by removal of such measures. As the behaviour of economic agents, overall economic activity... could change along with the elimination of the specific tax preference, the revenue implications could be different to that extent." 

As per the current year estimates, revenue foregone due to customs duty concessions, including revenue foregone from export promotion schemes other than drawback, has risen the highest, on a year-on-year basis, at 20 per cent to Rs 2,76,093 crore in FY12 from Rs 2,30,131 crore in FY11. Essentially, the revenue foregone in customs duties represents the difference between duty that would have been payable at tariff rates fixed under the Customs Tariff Act, 1975 but for the exemptions given by the central government (using its powers under Customs Act, 1962) and the actual duty paid after the exemptions.

In customs duties, the two major commodity groups, crude oil and mineral oils, and diamond and gold, accounted for the largest portion of revenue foregone. In June 2011, effective basic customs duty on crude petroleum oil was reduced from 5 per cent to nil, that on petrol and diesel was slashed to 2.5 per cent each from 7.5 per cent each. As a result, the customs duty revenue foregone from crude oil is estimated to be Rs 58,190 crore in FY12, 41 per cent more than Rs 41,200 crore in FY11. Customs duty foregone on diamond and gold, is seen to be at Rs 57,073 crore in FY12, 16 per cent higher than it was in previous year.

Revenue foregone due to personal income tax concessions, a large part of which is taken up through deductions allowed under Section 80C of the Income Tax Act, is estimated to be at Rs 42,320 crore in current year, 15 per cent higher than in previous year. Interestingly, tax concessions given to corporate tax payers is estimated to be 11 per cent lower, at Rs 51,292 core, than last year's Rs 57,912 crore.

Cost of tax incentives
The government has put a value to various tax concessions. Here's the latest.
	Revenue foregone during:
	2011-12*	2010-11	YoY change
Corporate income tax	51292	57912	-11.43
Personal income tax	42320	36826	14.92
Excise	212167	192227	10.37
Customs**	276093	230131	19.97
* estimates
** includes revenue foregone from export promotion schemes other than drawback
Figures in Rs crore