June 20, 2021

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A tale of three subsidies: Of farmers, industrialists and the middle class

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Uday Deb
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The protest by farmers on the outskirts of Delhi against the three central legislations covering agricultural trade and contract farming has triggered a public debate on the subsidies they receive.

A significant part of the commentary has pointed to the direct and indirect subsidies received by about 12% of India’s farmers who benefit from the minimum support price (MSP) regime, primarily wheat and paddy. This fact is usually woven into an argument against the ongoing protests.

One striking aspect of this comment is that it lacks a meaningful fiscal context. Consequently, many people coming across these comments may conclude that pampered farmers receiving handouts paid for by other sections of society are complaining.

That is incorrect.

The indirect subsidy received through MSP by protesting farmers is a part of the Centre’s fiscal policy. That is, tax policy and spending are designed to achieve certain objectives set by the government.

The same fiscal policy also transfers indirect subsidies to industry and middle class taxpayers to achieve some goals. Almost everyone receives an indirect subsidy. The farmers are not pampered in that sense.

Let’s take a closer look at India’s elaborate indirect subsidy regime.

We need to distinguish between two kinds of spending by the government. One, is the spending where there is nothing expected of the beneficiary. For example, in Delhi’s biting cold, night shelters for homeless people are run by the government. This is in the nature of a moral obligation of the state. There is no collateral economic goal in running night shelters.

There is another kind of spending which the Centre categorizes as indirect subsidy. Here, the government gives direct tax concessions to a preferred set of tax payers. The concessions are linked to certain actions on part of the beneficiaries and the overarching aim is to attain specific economic and social goals.

These concessions were quantified and placed in public domain for the first time in 2006 by the union budget. They were initially termed as “revenue foregone” and included in the Receipt Budget document. Currently, they are termed as “tax incentives” in the budget.

Tax incentives are, according to the budget, an indirect subsidy to preferred tax payers and represent a significant policy choice of the government.

Which are the biggest direct tax incentives?

According to the latest Receipt Budget, the annual revenue foregone on account of indirect subsidy to corporate tax payers in 2019-20 was about Rs 1.07 lakh crore.

Over time, the annual indirect subsidy to corporate tax payers has been rising. Five years ago, it was about Rs 65,000 crore.

The biggest component of this indirect subsidy is usually the concession given through provisions on depreciation arising out of investment in machinery and related capital equipment. In 2019-20, it was almost Rs 56,000 crore.

This indirect subsidy is not a handout to corporate tax payers. They get the concession if they fulfil certain conditions. Those conditions, in turn, depend on the government’s larger policy objective.

What of the middle class?

They receive an indirect subsidy channelled through tax concessions of an amount which is in the same range as direct tax concessions to coporate tax payers.

In 2019-20, the indirect subsidy through tax concessions to individuals and Hindu Undivided Families was about Rs 1.16 lakh crore. Around Rs 72,000 crore of concessions come from a single source, the tax deductions on payments such as insurance premium and towards provident fund under Section 80C of the Income Tax Act.

Here too, the government gives these indirect subsidies to encourage long-term savings which are needed to meet its goals.

How does the indirect subsidy regime for corporate tax payers and individuals link up with the MSP regime?

The open-ended procurement of paddy and wheat at a guaranteed price is the foundation of India’s food security programme which covers about 800 million people. MSP is a prerequisite to run the Public Distribution System in its current form. 

Nothing lasts forever. Therefore, there is no reason to believe the current MSP system is cast in stone.

However, for those who believe some farmers are being unreasonable, it may be insightful to go back in time to study reactions when the UPA II in 2009 introduced a draft of a comprehensive reform of the Income Tax Act to dismantle the entire system of indirect subsidies and move India to a regime of lower tax rates without exemptions.

That finance minister Nirmala Sitharaman is still tabling documents in the Parliament detailing trillions offered by way of direct tax concessions tells a story of how successful lobbying against direct tax reforms was a decade ago. That took place in comfortable surroundings within Delhi and not on its outskirts.

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Disclaimer

Views expressed above are the author’s own.

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Disclaimer

Views expressed above are the author’s own.

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