The Economic Survey for 2016-17 (Economic Survey 2017) will be presented on Tuesday, January 31, and will be the most authentic pointer of what to expect from Budget 2017. In this context, it would be interesting to recall some rare insights provided by the Survey last year that became famous as "implicit subsidy" even as the buzz this year is about universal basic income (UBI).
While it had all the usual commentary and GDP growth rate estimates for both the then financial year (20-15-16) and the next fiscal (7-7.75 percent for FY2017), the estimates of "implicit subsidy" at about Rs 1 lakh crore caught the attention of many analysts
As the explanation suggested, it was "implicit," a combination of unseen benefits, tax planning and "anomalies" in the system.
The areas identified by the Economic Survey for 2015-16 presented on February 26 last year were public provident fund (PPF), gold, LPG, electricity, aviation turbine fuel and kerosene. Here is a quick recap of what the Survey said on the "implicit subsidy" availed of under these heads.
Union Finance Minister Arun Jaitley will be presenting India's first unified budget on Wednesday, dispensing the 92-year-old tradition of a separate budget for Indian Railways; the provisions pertaining to railways will form part of Budget 2017.
It also comes amid expectations of tax cuts, incentives to MSMEs, boost to digital economy, sops for farmers, push to infra projects and damage control after demonetisation.
Here are some the areas where the Survey talked about "implicit subsidy":
Public Provident Fund (PPF)
A popular savings instrument among individuals, it gives tax-payers the EEE benefit (contributions are exempt up to Rs 1.5 lakh annually, interest is exempt and amount received at the time of withdrawal is exempt) and is used by many Indians in the top two income-tax slabs of 20 percent and 30 percent. Contributions to the PPF are exempt under Section 80C of the Income Tax Act.
"We can indirectly infer how well-off beneficiaries of the PPF scheme are. Roughly 62 per cent of total Section 80C deductions in FY 2013-14 were accounted for by taxpayers with gross taxable income more than Rs 4 lakh (47 percent by those earning more than Rs 5 lakh)," the Survey said.
"In sum, the effective returns to PPF deposits are very high, creating a large implicit subsidy which accrues mostly to taxpayers in the top income brackets. The magnitude of this implicit subsidy is about 6 percentage points â€" approximately Rs 12,000 crore in fiscal cost terms," it added.
The world's second-biggest gold consumer has a rather skewed pattern when it comes to consumption and the benefits thereof. "The 'rich' consume most of it (the top 20 percent of population accounts for roughly 80 percent of total consumption) and the poor spend almost a negligible fraction of their total expenditure on it," the Survey observed.
It then goes on to explain how the tax treatment for the yellow metal is inexplicable.
"Yet, gold is only taxed at about 1-1.6 percent (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.) In other words, there is a huge subsidy of about 25 percentage points (the difference between average tax on other commodities and tax on gold). About 98 per cent of this subsidy accrues to the better-off." according to the Survey.
"LPG consumers receive a subsidy of Rs 238.51 per 14.2-kg cylinder (as in January 2016), which amounts to a subsidy rate of 36 percent (ratio of subsidy amount to the market price). It turns out that 91 percent of these subsidies are accounted for by the better-off as their share of consumption of LPG in the total consumption is about 91 percent; while the poor account for only nine percent of LPG consumption and hence only nine percent of subsidies go to them. So, this subsidy, aimed at benefitting the poor, is hardly being used by them," the Survey said.
"The Rs 1 lakh crore of subsidy going to the better-off merely on account of six commodities plus the small savings schemes represent a substantial leakage from the government's kitty, and an opportunity foregone to help the truly deserving," the Survey said.