Ahead of the Budget, Finance Ministry on Wednesday said tax exemptions cost exchequer about Rs 2 lakh crore (Rs 2 trillion) annually and it is necessary to phase them out to provide a level playing field to domestic manufacturing companies so that Make in India can become a success.
"The focus of the Budget should be on tax rationalisation and simplification.
"The focus should be on promoting growth, employment and in terms of giving some sort of level playing field to domestic manufacturers so that the Make In India can happen," Revenue Secretary Hasmukh Adhia said.
His statement assumes significance as Finance Minister Arun Jaitley is getting ready to unveil 2016-17 Budget on February 29.
Removal of tax exemptions, Adhia said, would able the government to reduce income tax rate and give a more fair deal to people paying taxes.
"In direct tax, we are losing about Rs 1 lakh crore in these exemptions.
"The cause may be noble, but it distorts the taxation system. In case of indirect tax also, we are almost losing Rs 1 lakh crore (Rs 1 trillion) because of various exemptions given for SEZ, EOU.
". . . Had we not given all these exemptions we would have been able to probably reduce the income tax rate and we would have been given a more fair deal to people in paying the same thing," Adhia said in Finance Ministry's YouTube channel.
The tax department has already come out with a draft roadmap for phasing out tax exemptions, and the final roadmap would be unveiled in Budget.
"We cannot completely eliminate exemptions. . . If we are able to reduce the number of exemptions, then the amount we are losing in exemptions we would be in a better position to reduce taxation rates. . .
"Exemptions create inequity, it creates inequity between the existing unit and the new unit which is availing the exemption and it also creates inequity in terms of smaller companies and bigger companies," he said.
Adhia said removing the exemptions would also help in improving the tax: GDP ratio which is currently around 10 per cent.
"There is a need to increase the tax: GDP ratio but you also have to see the capacity of people to bear that kind of taxation burden.
"If we simply rationalise the taxation system and remove the exemptions, I am sure the tax to GDP ratio can be enhanced substantially," he added.
In order to attract foreign investment, Adhia said there was a need to do away with multiplicity of central and state government levies and the only solution to this is GST.
Goods and Services Tax would usher in an unified indirect tax regime which will subsume various levies like excise, service tax, sales tax, octroi, etc.