An autonomous research institute under the Ministry of Finance


Trends and Patterns of Tax Expenditures on Union Taxes in India

Publication date

Apr, 2022


NIPFP Working Paper No. 380


Sacchidananda Mukherjee


The Union government foregoes revenue on account of various tax exemption/incentive schemes promoted for various purposes. The Constitution of India assigns power of taxation of broad-based taxes to the Union (Federal) government (e.g., Corporate Income Tax, Personal Income Tax, Union Excise Duty, Customs duty). Like the Union government, provincial (or State) governments also provide tax incentives (within the scope and coverage of their taxation power) but revenue impacts (or foregone) of those tax exemption schemes at the state level are not assessed yet. Comprehensive assessment of tax expenditures is important especially after the introduction of Goods and Services Tax (GST). Given the data limitations, the present paper assesses the trends and patterns (structure) of tax expenditures of Union taxes during 2005-06 to 2019-20. Overall tax expenditures of the Union government declined from 8.15 per cent of GVA (Gross Value Added) in 2008-09 to 1.69 per cent in 2019-20. It was possible mainly on account of continuous reduction of tax expenditures on indirect taxes. Tax expenditures on direct taxes (on account of CIT and PIT only) also declined from 32.7 per cent of direct tax (CIT & PIT only) collection in 2008-09 to 22.4 per cent in 2019-20. The tax expenditures related to Union Excise Duty (UED) and Customs Duty (CD) declined from 152 per cent in 2008-09 to 12.6 per cent of tax collection on account of UED and CD in 2019-20. Post Global Financial Crisis (GFC) successive Union budgets raised standard rate of excise duty gradually to pre-GFC level, pruned down the exemption list and consolidated rate structure of excise duty (or CenVAT) to prepare for introduction of GST. This helped the government to contain tax expenditures on
indirect taxes.
Key Words: Tax Expenditures, Tax Incentives, Tax Policy, Federal Government, Union Taxes, India.
JEL Codes: H25, H24, H61, H11, D72
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