This is according to a study just completed by the National Institute of Public Finance & Policy for the finance ministry.
The loss adds up to around 1.6 per cent of the GDP (total central tax collections amount to 10.5 per cent of the GDP), a figure that is much higher than the target set by the Twelfth Finance Commission for the year 2009-10. The commission's target is a 1.2 percentage-point hike in tax collections.
The study estimates that tax losses due to export incentives are around Rs 10,000 crore (Rs 100 billion), a figure that is considerably lower than what the finance ministry had estimated earlier.
This is because the NIPFP is of the view that many earlier estimates of tax concessions are really neutralising taxes paid during the process of manufacturing for exports and that, they will have to be refunded.
So, the tax loss on this estimated by the NIPFP is on account of the income tax holiday alone. While Sections 10A and 10B of the Income Tax Act for FTZs and EoUs are to be phased out by 2010, the SEZ Act 2005 has given this a new lease of life.
The NIPFP estimates that exemptions given to the housing sector add up to a whopping Rs 8,000 crore (Rs 80 billion). For charities, the amount is another Rs 8,000 crore and for income from agriculture that is not taxed, it is Rs 10,000 crore.
Exemptions given to the small scale sector amount to Rs 12,560 crore (Rs 125.60 billion). About Rs 4,000 crore (Rs 40 billion) are lost due to various Customs and excise duty exemptions on different commodities.
This, apart from causing a huge tax loss, is also the main reason why a huge Customs and excise bureaucracy exists since each exemption needs clearance.
The NIPFP study has been conducted by Professor Emeritus and tax guru Amaresh Bagchi, Senior Fellow Kavita Rao and consultant Bulbul Sen. Sen is an IRS officer on deputation to the NIPFP. These are initial numbers and the NIPFP plans more detailed studies on major tax concession areas.
An NIPFP team, for instance, will visit areas like Himachal Pradesh and Uttaranchal to get the details of investments being planned in these two new excise tax havens. Its report should be available in two months.
Given the pace at which industries are shifting to these two states, the figure of Rs 2,000 crore in tax losses from this region, as mentioned by the NIPFP, may increase dramatically.
Interestingly, an impact study of the tax holiday policy in the Northeast has found that there is no large-scale investment in the region due to tax holidays.
Another tax holiday, which is likely to grow fast, is the one for housing. This is because housing is a high-growth sector and already accounts for a significant portion of the GDP. While real estate accounts for 9.6 per cent of the GDP, housing accounts for 4.5 per cent.
In the case of charities, the report points out that due to loose definitions of what charity is, private educational institutes and hospitals that charge very high fees also enjoy tax exemptions. The NIPFP uses a study of the income tax department which has found that nearly 60 per cent of the income of a 100 trusts, chosen for scrutiny, came from business activities.
The estimate of losses owing to the farm sector being not taxed is based on an estimate of farmers holding over 8 hectares of land and an estimate of the surplus per hectare.
The SSI estimate is based on the total production of the registered SSI sector, from which exports as well as production of intermediates are excluded since this is tax-free anyway. Excise duty is then applied to the remaining production to arrive at a tax exemption figure.
