Budget 2014: Tax Exemptions and Concessions – How Much the Government Loses, to Help Tax-payers Gain

Comments Off Written on July 29th, 2014 by
Categories: General

To continue from where we left off with the Statement of Foregone Revenue, let’s now look at how companies have availed tax sops at different levels.

Note: We use the Statement of Foregone Revenue for FY2012-2013 which contains data on corporate returns for the year that were filed by the 31st of March, 2014. From these returns, the government gets data on how much companies use the tax exemptions (meaning monetary value, numbers) from which they can estimate foregone revenues for that year. These are lagged reports. Now the government already knows how much they have received as ‘Corporate Taxes’ up till 31st March 2014; that’s for the current year, FY2013-2014. So now, they have data on taxes received for the current year, and taxes for the previous year; they obtain the growth rate in corporate taxes, and then use this rate to estimate the potential ‘revenues foregone’ for the current year. This year, corp tax grew at 10.76%, up from a growth rate of 10.23% seen the previous year. Based on the 10.76% rate, we have estimates of Revenues Foregone for the current year.

We also use the Statement of Foregone Revenue for FY2011-2012, FY2010-2011 and FY2009-2010.

INDIVIDUAL CONTRIBUTORS:

We’ll list out the major contributors with their values:

Total_Rev_Foregone

The way these estimates are arrived at, is to take the deductible amount under each category, and multiply it with the statutory corporate tax applicable during that year. For the current year, statutory corporate tax is at 32.445%.

Now, there are a few simplifying assumptions that are made in order to arrive at the estimates, so it makes more sense to use these figures as tools for comparisons, rather than look too closely at their absolute values.

  • The largest contributor: Accelerated Depreciation.

Projected value was Rs. 37, 831.7 cr for the year. The actual value was Rs. 38,122.7 cr. That’s an increase of 11.08% from last year. And that’s 41.2% of the total Revenues Foregone.

Accel_Dep

  • Deduction of Export Profits of Units in SEZs contributed to 14.6% of the total. It amounted to Rs. 13.535 cr, an increase of 24% from last year.

Export_Profit

  • Deduction for Expenditure on Scientific Research accounted for 6.96% of the total. Amounted to Rs. 6,448 cr, an increase of 12.28% from last year.

Sci_Research

  • One of the largest portions was due to Deductions of Profits from Generation, Transmission and Distribution of Power. Having a 9.58% share of the total, this portion showed an increase of 6.86%.

Power

  • Another major contribution was from deduction of profits from production of mineral oil and natural gas. 8.8% of the total pie, with a growth of just 1.8%.

Oil_NGas

  • There was an addition this year, in the form of Deductions for Expenditure on Specified Business. This was not a concession in the preceding years, and probably explains why the actual Revenues Foregone for the year, overshot its forecast. It contributed Rs. 2,473 cr, a 2.67% share of the total.

REVENUES FOREGONE:

For the current year, the stat tax rate was 32.445%. Based on this, an estimate of total revenue foregone from corporate taxes was estimated at Rs. 68,720 crores as against a projection of Rs. 68,007.60 crores that was made. Part of this increase can be attributed to the inclusion this year, of a deduction for expenditure on specified business, which amounted to Rs. 2473.4 cr.

When we analyse the trend of Revenues Foregone, we spot something quite intriguing.

Total_Rev_Foregone_02

In 2009-2010, we see that the Revenues Foregone was Rs. 72,881 cr. The following year, there was an introduction of a concept called Minimum Alternate Tax (MAT) on companies. So this is how it works: The government levies a minimum tax of 20% on the net profit of a company. Now, if this MAT is greater than the actual tax liability of the company (taxes that are to be paid as per the normal tax laws), the excess tax liability is allowed to be used as a credit within a period of 10 years. This credit can be used to cancel/reduce future tax payments. In other words, the excess is considered a pre-payment of future taxes.

Hence, any excess that is paid out by companies due to this concept of MAT, has to be included as additional revenue for the government, and hence reduces the Revenues Foregone. Due to this, Revenues Foregone for subsequent years (2010-2011 onwards), is reduced by the amount of ‘Net Additional MAT’. That explains the reduced figures we see at the bottom of the table.

Total_Rev_Foregone_03

OUR VIEW:

Even though this concept of Revenues Foregone is purely a notional one, its analysis can reveal some insights into tax-exemptions and into the trends of usage of various concessions.

  • The major contributor by far, for the last few years, is due to the use of Accelerated Depreciation; 55.5% share this year.
  • There are many intriguing opportunities if a firm wants to make use of the tax exemptions. Take for example, the tax concessions due to investments in Jammu & Kashmir, the North-Eastern states, even Uttar Ranchal. Coupled with exemptions for production of oil and natural gas, these promote investments in certain industries and areas.
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