Can we expect a sharp rationalisation of subsidies and individual tax exemptions in the current budget? The government has already given a roadmap for removal of corporate exemptions and tax deductions, is it now preparing for a similar exercise in the coming years, if not immediately in the budget?

The Economic Survey 2015-16 has an entire section on bounties for the well-off, which points out that subsidies worth Rs 1.03 lakh go to relatively better-off in the society. These subsidies are  extended to the rich and well-offs through petroleum products, electricity tariff, train fares, gold and tax benefits on small savings scheme.

The biggest contributor to this is subsidy through LPG, which accounts for Rs 40,000 crore, or 40 per cent, of the total subsidy enjoyed by the well-offs, followed by subsidy on electricity (Rs 37,000 crore) and subsidy on account of Public Provident Fund (PPF), which the Survey said accounted for around Rs 12,000 crore. Kerosene subsidy cornered by rich and well-off amounted to Rs 4,500 crore, railways Rs 3,600 crore and gold accounted for Rs 4,000 crore.

The rich or well-off according to the Survey are the top 70 per cent of the population. This categorisation has been done based on expenditure distribution as per National Sample Survey data.

LPG and electricity

According to the Survey, rich and well-offs corner 91 per cent of the subsidy on LPGs, which were available at 36 per cent lower rates than the market price.

In case of electricity, 84 per cent of the subsidy is cornered by rich. The survey points out that “the rates charged to the better-off are subsidised to the extent of 32 per cent, and the poor, 49 per cent (average for Delhi and Tamil Nadu).”

Small savings scheme

The survey makes an interesting observation that some of the schemes under the Small Savings Scheme (which benefits from income tax benefits) are not ‘actually small’. It has, therefore, divided the small saving schemes into three categories–actually small (most post-office savings schemes barring PPF), not-so-small (PPF) and not small at all (tax-free bonds).

The survey observes that an implicit subsidy rate on PPF alone is 6 per cent, and accounts for Rs 12,000 crore subsidy to well-offs.
It notes “We can indirectly infer how well-off beneficiaries of the PPF scheme are. Roughly 62 per cent of total 80C deductions in 2013-14 were accounted for by taxpayers with gross taxable income more than Rs 4 lakh (47 per cent by those earning more than Rs 5 lakh). These individuals are at the 97.3rd and 98.4th percentiles of the income distribution respectively”.

Gold

According to the survey report, the ‘rich’ consume most of it (the top 20 per cent of population account for roughly 80 per cent of total consumption) and the poor spend almost negligible fraction on it, yet gold 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). Therefore, it says that there is a huge subsidy of about 25 percentage points.

Railways

According to the Survey, the subsidy rate (implicit subsidy as a ratio of actual cost of journey to railways) amounts to 34 per cent for the better-off and 69 per cent for the poor.

The implicit subsidy has been calculated by comparing the actual fare charged to the consumers with the marginal cost of supply (difference between earning per km and cost per km). For this the survey assumes that the categories of A/C, first class, second class, sleeper as the primary modes of rail travel by rich and unreserved category as mode of travel used primarily by the poor.

[Source:- Businesstoday]