Economic Survey: Tax on small savings mooted

New Delhi: Subsidy and tax concessions in railways, power, aviation turbine fuel, gold and kerosene and small saving schemes provide a bounty of about Rs 1 lakh crore to the well off, said Economic Survey 2015-16 on Friday.

It said that policies that are based on providing tax incentives in India, benefit not the middle class but those at the very top end of the income distribution.

This is the first time that Economic Survey talks about the benefits reaped by the Super rich through a favourable tax regime, something brought to prominence by well known French economist Thomas Piketty book Capital in the Twenty-First Century and the Occupy Wall Street movement after the financial crisis.

This observation could signal the Modi government’s intention to curb these subsidies going to the well off in the future.

The survey said that Indian state’s generosity is not restricted to its poorest citizens but in many cases, the beneficiaries are disproportionately the well-off.

According to the calculation done by survey, subsidy or tax benefits enjoyed by the rich in LPG is Rs 40,151 crore, in electricity Rs 37,170 crore, PPF Rs 11,900 crore, kerosene Rs 5,501 crore and in gold Rs 4,000 crore.

The survey said that it is misleading to characterise small savings schemes (National Savings Certificate, tax free bonds and PPF among others) as “small”, which offer higher rate of returns and tax incentive.

It said that any tax incentives given for savings doesn’t benefit the middle class or the upper middle class but it benefits the super- rich, who represent the top 1-2 per cent of the Indian income distribution. “While in most countries the beneficiaries of tax incentives will range from being middle class to very rich, in India they are the super-rich,” the survey said adding that all tax saving schemes should be taxed on maturity.

The Survey also said that while gold is consumed mainly by the rich, it is only taxed at about 1-1.6 per cent (States and Centre combined), compared with tax of about 26 per cent for normal goods (the central government’s excise tax on gold is zero compared with 12.5 per cent for normal commodities).

In other words, the survey said there is a huge subsidy of about 25 percentage points (the difference between average tax on other commodities and tax on gold) on gold and about 98 per cent of this subsidy accrues to the better-off.

Similarly, the survey pointed out that ATF is taxed at about 20 per cent (average of tax rates for all states), while diesel and petrol are taxed at about 55 per cent and 61 per cent (as in January 2016). “The real consumers of ATF are those who travel by air, who essentially are the well off,” it said.

The survey said that Indian state’s generosity is not restricted to its poorest citizens but in many cases, the beneficiaries are disproportionately the well-off.

Tax revenue may be higher

India’s tax revenue for the current financial year 2015-16 is likely to be higher than budgeted levels while the Reserve Bank of India (RBI) is expected to meet the five percent inflation target by March 2017, the Economic Survey present by finance minister Arun Jaitley said on Friday.

It also called for higher tax to GDP ratio, which is currently at 16.6 per cent and is well below the emerging market economy (EME)and OECD averages of about 21 per cent and 34 per cent respectively.

Closed linked with world

India’s growth is more tied with the global economy than ever, says survey. “One percentage point decrease in the world growth rate is now associated with a 0.42 percentage point decrease in Indian growth rates,” said the survey. For the period 1991-2002 this correlation was 0.2. Since then, the correlation has doubled to 0.42.

m-Payments game changer

Enhanced mobile payments technology along with 4G introduction will prove to be a game changer, facilitating the implementation of government's social sector schemes in a faster and more secure manner, says the Economic Survey. Besides, connectivity through optical fibre network will also help transform the delivery of these programmes.

Steps to exit business are a must

Likening the Indian economy to the Charkravyuha legend of the Mahabharata, the ability to enter but not exit, the Economic Survey cautioned that the country is facing adverse consequences due to the lack of a way out for failed ventures. The survey said the government is looking to facilitate exit through a host of initiatives, including the new bankruptcy law, rehabilitation of stalled projects, proposed changes to the Prevention of Corruption Act.

Valuation of startups low

India may boast of being home to around 19,400 technology-enabled startups, but exit valuation for the investors looking to cash in on the initial funding still remains low, says an official survey. It said the startup sector in the country is witnessing “unusual dynamism”, focussed on e-commerce and financial services.