‘Freebies’, a judicial lead and a multi-layered issue

While it is useful to start with the definition of ‘subsidies’, the issue of ‘tax preferences’ also merits attention

Updated - August 27, 2022 05:42 pm IST

Published - August 26, 2022 12:16 am IST

‘Handouts from the Government, whether they are in the form of “tax preferences”, tax-cuts and the plethora of incentives are given for realising specific objectives.’

‘Handouts from the Government, whether they are in the form of “tax preferences”, tax-cuts and the plethora of incentives are given for realising specific objectives.’ | Photo Credit: bgblue

The Prime Minister’s recent comment on “freebies” handed out by governments has reignited the debate on the economic rationale for granting subsidies. Market fundamentalists have seized the opportunity to press home the point yet again that subsidies are, per se, undesirable for they contribute to suboptimal outcomes for the economy. This unbridled affront on subsidies does not make a distinction between transfer payments that are made for running social welfare schemes (without which disenfranchised citizens of this country cannot hope to survive). When this debate began to go astray, it needed a strong reminder by the Supreme Court of India that in the on-going debate on subsidies and “freebies”, a distinction had to be made between expenditure made on social welfare schemes and “irrational freebies” offered to voters during elections.

A closer look at the Budget

The lead given by the Supreme Court to engage in a discussion on subsidies must be seen as the starting point to deal with an issue that is truly multi-layered. This becomes evident from a close reading of the Union Budget and the manner in which the various governments have presented data pertaining to subsidies and transfer payments. A more critical aspect is to understand why it is imperative for the Government to continue with agricultural subsidies and extend support to ensure that health and educational services are available to all. This issue needs to be raised as the narrative of market fundamentalists routinely harps on reducing government spending. But before delving into the intricacies of the way these payments have been presented for public consumption, it may be useful to start with the definition of what can be considered “subsidies”.

Although ‘subsidy’ is among the most discussed issues, a legally acceptable definition of this instrument is hard to come by. One exception is the Agreement on Subsidies and Countervailing Measures (ASCM) of the World Trade Organization. According to ASCM, a subsidy shall be deemed to exist if there is a financial contribution by a government or any public body where government practice involves a direct transfer of funds (e.g., grants, loans and equity infusion), and/or government revenue that is otherwise due is foregone or not collected, and/or a government provides goods or services.

‘Subsidy’ can also be any form of income or price support granted by the government. This is a comprehensive definition of what subsidies are, for it includes not only direct transfer payments by the governments but also taxes and charges that are not collected. This aspect has gone under the radar in the on-going discussion.

The Union Budget has provided data on direct subsidies and transfer payments from 2006-07 in a statement titled “Revenue Foregone under the Central Tax System” annexed to the Receipts Budget. Thus, the Union Budget includes all categories of subsidies that figure under the ASCM definition. However, from the Union Budget 2015-16 onwards, the title of the annexure was changed to “Statement of Revenue Impact of Tax Incentives under the Central Tax System”. So, replacing the term “revenue foregone” with “tax incentives” in the title of the Annexure was just a change in semantics.

Also Read | Are freebies a way to mask state inaction?

Policy and measures

Tax policy includes a range of measures that include special tax rates, exemptions, deductions, rebates, deferrals, and credits, all of which affect the level and distribution of tax. These measures are often called “tax preferences”, which are built into both direct and indirect tax regimes for realising specific benefits serving the greater public good. For instance, the Income-tax Act includes “tax preferences” to promote savings by individuals and for enhancing exports, creation of infrastructure facilities and scientific research and development by corporates. On the other hand, customs duty concessions are intended to promote exports. The more substantive point here is that tax preferences are considered as implicit (indirect) subsidies to preferred tax payers; therefore, they merit attention in the current debate on justification of subsidies.

Data on revenue foregone was first provided along with the Receipts Budget of 2006-07 covering both direct and indirect taxes. As regards direct taxes, which we shall consider here, data on its major components are obtained from the returns filed electronically by corporate and non-corporate assessees. The significance of revenue foregone in the case of direct taxes was underlined in a 2016 Comptroller and Auditor General of India (CAG) report in 2016, which showed that revenue foregone in 2010-11 was 21% of direct tax revenue and had decreased to 15% in 2014-15. However, a subsequent report showed that the share climbed again to reach 22% of tax revenue in 2019-20.

There are several important facets of the “tax preferences” provided by the Government in respect of direct taxes that are germane to this debate on subsidies. First, as compared to individuals, corporates have been enjoying a larger share for all years except in 2019-20 when the share of individuals inexplicably increased. The figures of 2019-20 are significant also because “tax preferences” for corporates registered an increase, even as corporate taxes were reduced. And, finally, while the Finance Minister spoke about eliminating “tax preferences” available to income-tax payers in lieu of lower tax slabs, which is optional at present, the corporate sector enjoys “tax preferences” as well as lower tax rates.

A related issue that must be mentioned here is that handouts from the Government, whether they are in the form of “tax preferences”, tax-cuts and the plethora of incentives are given for realising specific objectives. If these objectives are not realised, as for instance, the corporate tax cuts effected in 2019-20 did not result in higher private investment as the Government had expected, should this tax cut not be considered “freebies”?

Fading support

This brings us to a much larger issue of targeting agricultural subsidies and also support provided to public health and education for making these services available to all. Market fundamentalists have forever opposed these subsidies/support by arguing that they are a wasteful use of resources. But this argument has gained currency since every Central government in the past three decades has adopted policies to whittle down support to these sectors extended by the government. Public health and education have consistently been undermined to create space for private players. And, in agriculture, the Government had brought the controversial farm laws for dealing with the issue of increasing farm subsidies.

An underinvestment

While adopting policies targeting these sectors, successive governments have paid little attention to the dismal reality of under-investment in these sectors. Public expenditure on health has struggled to cross 1.5% of GDP, which is significantly lower than those in other major economies. In education, the Kothari Commission’s target set in 1966, that public investment should be increased to “6 percent of the national income as early as possible” is but a distant dream.

That agriculture has remained the neglected sector hardly needs to be emphasised. The most galling fact is the astonishingly low share of the country’s investment that this sector receives. At the turn of the millennium its share was 10%; in recent years, it has almost halved. As the crisis in agriculture has deepened as a result of this chronic underinvestment, subsidies have been the palliatives extended by the Government for farmers to merely protect their livelihoods. Will the naysayers still call agricultural subsidies “freebies”?

Biswajit Dhar is Professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi

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