The Karnataka Government's tax sops to industry resulted in forgone revenues of Rs. 936.94 crore in 2011-12, according to a key document appended to the budget papers that were presented to the State Legislature by Chief Minister D.V. Sadananda Gowda on March 21. The Medium Term Fiscal Plan (MTFP), a document that spells out the government's agenda for taxation, reveals the extent of revenue losses arising from tax exemptions, tax deferrals and from “tax expenditure”, which, in the taxman's parlance, refers to the loss that the government suffers on account of the tax breaks it offers.
Ironically, the document, which is so focused on fiscal prudence and which calls for moderation in subsidies, has little to say about reducing these revenue losses. After all, in terms of economic principles, forgone revenues are no different from subsidies. Significantly, the magnitude of lost revenues would have been much more than the food subsidy bill of the State Government in 2011-12. In fact, in a year when food prices remained high, the Karnataka Government actually spent 30 per cent less on food subsidy than what it spent in 2009-10.
How it adds up
A senior official in the Finance Department told The Hindu that forgone revenues resulting from outright tax exemptions amounted to Rs. 304.09 crore. He said these losses were compiled from data provided by the Department of Industry and Commerce.
Additional data in the document, sourced from the Commercial Taxes Department, shows that between April 1, 2011 and October 31, 2011, the government ‘lost' revenue of Rs. 306.97 crore because of various tax exemptions. It also shows that tax deferrals, which, according to a bureaucrat “are nothing but interest-free loans from the government to tax payers”, amounted to Rs. 325.88 crore. The actual losses for the full financial year will be substantially more because it does not include losses for five of the 12 months in the fiscal. Thus, the total loss, computed from two separate tables presented in the document, amounted to Rs. 937 crore.
Exemption from entry tax and the deferred payment of VAT (Value Added Tax) by companies were the most-favoured methods of offering tax concessions to industries. The exemptions from entry tax cost the government about one-third of all revenue losses in 2011-12. The postponement of VAT collections cost the government Rs. 238.59 crore — about one-fourth of all revenues forgone by the government.
The waiver of the Agricultural Produce Marketing Committee (APMC) cess resulted in lost revenue amounting to Rs. 72 crore.
Sugar mills benefit
Ten sugar units — among them Nirani Sugars Pvt. Ltd., founded by the State Industries Minister Murugesh R. Nirani — benefited to the tune of Rs. 23.58 crore from the State's deferment of purchase tax on sugarcane bought by these units. While Bagalkot-based Nirani Sugars benefited by Rs. 5 crore, Davangere-based Indian Cane Power Ltd. benefited by Rs. 5.14 crore. “These deferrals are nothing but a 10-year interest-free loan to the sugar companies,” said a senior official.
J.K. Cements' unit in Bagalkot benefited to the tune of Rs. 41.50 crore from a “VAT loan”. Deferred tax payments by biotechnology major Biocon Ltd. and auto company Toyota Kirloskar Pvt. Ltd. amounted to Rs. 65 crore and Rs. 195 crore respectively. However, the biggest gainer from such exemptions was Mangalore-based MRPL, a subsidiary of the public sector oil exploration company ONGC Ltd. While the waiver of Central Sales Tax to the company amounted to Rs. 78 crore, the waiver of entry tax set the government revenue back by Rs. 196 crore.