The Irony of Tax Exemptions
With the annual budgets to be announced by the end of this month, everyone is talking about impending tax concessions to help face the high inflation. However, only last year the government announced massive tax concessions that did not help face inflation

i·ro·ny

1.
a. The use of words to express something different from and often opposite to their literal meaning.
b. An expression or utterance marked by a deliberate contrast between apparent and intended meaning.
c. A literary style employing such contrasts for humorous or rhetorical effect.

2.
a. Incongruity between what might be expected and what actually occurs.
b. An occurrence, result, or circumstance notable for such incongruity. See Usage Note at ironic.
(Source: thefreedictionary.com)

Life is full of ironies. Economics has its fair share. Take, for example, the issue of tax exemptions. The government taxes us for numerous activities, the primary being earning our income. Income tax has always been a highly detested tax: For some unexplainable reason, the government takes away some part of our hard earned money. This is because the revenues to the central coffer are used to finance certain important projects and services crucial for our all of us collectively. Thus, Sher Shah built the Grand Trunk road, Qin Shi Huang built the Great Wall of China, and we are currently building the Golden Quadrilateral (under a Public Private Partnership, with 40 percent government funding nonetheless) out of tax revenues. Services like the army, the police etc. are financed from the revenues the government earns from us. Public Finance is a specialised field in economics that deals specifically with these issues.

It is true that the authorities have always used such revenues for their own personal quirks and benefits as well. Shah Jahan built the Taj Mahal for his wife as a mausoleum, and many of our current MPs allegedly have built enough Swiss Bank reserves to build few more, all from the taxpayer’s money. In the current context, with so many cases of corruption in the news, it is no wonder that we all are disgusted with how our money is being pilfered by the authorities. Contributing to that reserve that they abuse is a highly detestable thought.

However, the biggest grouse perhaps is the issue of inflation. We are all reeling under its blow, finding it hard to make ends meet. Since it is not always possible to raise one’s income at the same rate of inflation, the least we can expect is for the government to take less out of our pockets. Tax exemptions, therefore, are a top priority for everyone, and most budget wish lists will definitely have them on top of the list. Most importantly, the Finance Minister is also expected to cater to that need in this year’s budget.

Therein lies the first irony. The government is supposed to rein in high inflation and not yield to it. Accepting the logic of tax exemptions in the face of high inflation is an admission that inflation is uncontrollable, almost inevitable. Tax exemptions as a measure under inflation are not so much a policy to deal with inflation, but rather to surrender to it. We should expect a more proactive role from the government. Tax exemptions only address the symptoms; they do not cure the ailment. It is supposed to bring relief (tax exemptions are often referred to as tax relief as well) as much as Aspirin is supposed to for sinusitis. Every painkiller has the probationary warning “consult doctor immediately if symptoms persist.” Last year, India took a large dose of tax exemptions for relief from inflation. The Finance Minister announced a total loss of Rs26,000 crores from direct taxes alone. However, the inflationary symptoms have not only persisted but also worsened. It’s time for the doctor to change the prescription.

More crucial is the question, did tax exemptions really provide relief to the common man; the beloved aam aadmi of the country? Therein lies the second irony. Look at the tax exemptions given last year. Looking across the whole range of income tax concessions, a skewed distribution is most evident. Relief rates were raised as the income level rose, with no relief for the bottom half at all! Don’t forget the fact that a large section of our population earns less than Rs 20 per day, and thus do not fall under the tax bracket at all and therefore, by the Finance Ministers’ logic, are not entitled to any relief at all! The Finance Minister said that the income tax relief will benefit 60 percent of the population, but chose to ignore mentioning which half of the spectrum it would relieve. It was not offered according to who needs it most, but according to who has more say in society. Last year’s tax exemptions were not a relief measure, they was a step taken to assuage the more powerful sections of society, graded according to their power and importance.

However, there is no denying that the sizeable middle and upper middle class, who form the most vocal section of the society, did get tax relief, and made good of it. If last year’s auto industry growth is any indicator, the high selling A segment hatchback category is a reflection that this class did manage to even prosper under such adversities. If the government did provide relief to even 60 percent of the population as claimed (even if it’s the upper segment of society), it is
commendable given it covered more than half of the nations population.

Open your eyes to the third irony. What does a tax exemption actually do to the National Income? The National Income expenditure side of the equation consists of three parameters, Consumer Expenditure (denoted by C), Private Investment (denoted by I) and Government Expenditure (denoted by G). Tax exemptions essentially mean that G is going to fall (unless we resort to deficit financing, which is an entirely different story), but most importantly, the components C and I will rise. However, such increases reflect higher monetary liquidity in the economy. Enter the RBI. Over the year, the central bank of the country has blamed higher liquidity in the economy as a major threat, blaming it for the high inflation. They have consistently taken measures to reduce liquidity and raise interest rates. While the Finance Ministry takes steps to ensure more money in your hand, the central bank decides to soak it out of the economy. Thus, you get a fall in you tax rate only to find your EMI on home loans and car loans being raised. The most baffling thing about this whole story is the contradictory stances of the two government institutions. Will the government kindly resolve this contradiction before presenting this year’s budget?

So, do we need tax exemptions or not? If the government decides to take hard fiscal interventionist measures to tackle inflation, it will need the resources for it. Tax exemptions in such a situation could be disastrous. In fact, if the proper steps are taken, such exemptions will not be necessary at all. But how many of us expect the government to take such steps? I am kind of skeptical. Therefore, I put tax exemptions on the top of my budget wish list.