Expert Zone

Straight from the Specialists

Budget 2013: Need to review tax incentives


(Any opinions expressed here are those of the author and not those of Reuters)

It’s going to be a tight budget this year and Finance Minister P. Chidambaram will be looking to save every rupee in revenue to reduce the budget deficit, to which he has committed. One option would be to withdraw tax incentives which have outlived their purpose.

The finance ministry is only too aware of revenue lost from tax incentives. In 2011/12, it was a loss of 5.29 trillion rupees. If tax incentives are withdrawn, the 2013/14 budget would be in surplus. Nothing would amuse the finance minister more.

What really are these incentives? For the ministry, it is the revenue loss caused by the difference between the generally prescribed rates and effective rates of taxation. That exaggerates and even distorts the meaning of incentives.

The loss from taxation of corporates, firms and individuals is estimated at 936 billion rupees. That includes “accelerated depreciation” leading to a loss of 364 billion rupees. In the United States and many other countries, this is an accepted accounting principle.

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