Rich grab Rs 1 lakh crore subsidy

Sops for the poor tend to attract attention, but a number of policies help the well-off

The rich and well-off in the country are relishing government subsidies worth about Rs 1 lakh crore via small savings schemes, train fares, cheap power and fuel, the Economic Survey 2015-16 has pointed out, in what could be a curtain raiser for gradual rationalisation of subsidies and elimination of tax exemptions.

Weeding out such unintended beneficiaries or sops makes sense for the government not only from the fiscal and welfare perspective, but also from the political economy standpoint.

"The Rs 1 lakh crore 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 in a chapter entitled `Bounties for the Well-Off’, said.

It noted that subsidies for the poor tends to attract policy attention, but a number of policies provide benefits to the well off.

The largest chunk of subsidy is on account of LPG, which contributes Rs 40,151 crore to the total of Rs 1.03 lakh crore. Not surprisingly then, prime minister Narendra Modi has been appealing to people to give up the subsidised cooking gas cylinders, if they can afford.

The Economic Survey said that the better-off section of the society laps up 91 per cent of the subsidy given on LPG. "This subsidy, aimed at benefiting the poor, is hardly being used by them," underlined the document.

The LPG is followed by subsidised electricity tariff with a share of Rs 37,170 crore. The survey in its cost-benefit analysis found that well-off people were benefiting from subsidy on account of PPF to the extent of Rs 11,900 crore.

In the case of tax sops for savings/investments, the survey found that tax incentives that are given, for example, for savings, benefit not the middle class or the upper middle class, but "the super-rich who represent the top 1-2 per cent of the Indian income distribution."

What the survey finds interesting is that the top tax beneficiaries are not the middle economic strata, but actually the richest. "Now, it is by definition true that top taxpayers will be beneficiaries of tax incentives. However, in most countries, they will range from being middle class to very rich. In India, they are the super-rich," it said.

Analysing the benefits accruing on account of lower tax on gold, the Economic Survey said that the top 20 per cent of the population consume 80 per cent of the gold, which is taxed at about 1-1.6 per cent (state and Centre combined) compared to about 26 per cent for normal goods.

"About 98 per cent of this subsidy accrues to the better-off and only 2 per cent to the bottom 3 percentiles," the survey said.

It is estimated that the government spends about 4.2 per cent of the GDP in subsidising various commodities and services. The survey claimed that government policies based on providing tax incentives benefit not the middle class, but those at the very top end of the income distribution.

Even low ATF taxes is apparently an indirect subsidy! The government is indirectly subsidising air transport, used generally by well-off sections of society with tax on jet fuel being about one-third of diesel and petrol, the Economic Survey said.

Days before the Union Budget 2016, the survey indicates that there is little hope for the aviation sector to get tax concessions on aviation turbine fuel (ATF), which accounts for 40 per cent of their operating costs.

The survey said that aviation fuel is taxed at about 20 per cent (average of tax rates for all states), while diesel and petrol are taxed at about 55 per cent and 61 per cent respectively.

"Aviation fuel is taxed at about 20 per cent (average of tax rates for all states), while diesel and petrol are taxed at about 55 per cent and 61 per cent (as in January 2016) respectively. The real consumers of ATF are those who travel by air, who are also the well off. Hence there is an implicit subsidy for air passengers," noted the annual document on the state of economy.

However, not all agree that ATF taxes are a subsidy, given the fact that ATF prices in the country are steep compared to global rates. The difference is mainly because of a plethora of taxes.

"ATF in India is almost 60-70 per cent costlier than the global average due to policy apathy in the past, opaque pricing structure and multitude of taxes - excise, customs, VAT. Calling it subsidised fuel for the well off is misleading. ATF can be called ‘subsidised’ if it is sold cheaper than global prices," said Amber Dubey, partner and head of aerospace and defence at global consultancy KPMG.

The survey also made a case for taxing gold, saying the precious commodity 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 to 12.5 per cent for normal commodities).

In an apparent move to address the issue of rationalising subsidy, Modi had last month compared subsidy for the poor with tax-breaks for the rich.

"When a benefit is given to farmers or to the poor, experts and government officers normally call it a subsidy. However, I find that if a benefit is given to industry or commerce, it is usually called an 'incentive' or 'subvention'. We must ask ourselves whether this difference in language also reflects a difference in our attitude? Why is it that subsidies going to the well-off are portrayed in a positive manner?" he had asked.

(With inputs from Nirbhay Kumar in Delhi and Kumar Shankar Roy in Kolkata)

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