Topic- Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.
6) Tax incentives are a significant of revenue foregone and the govt should prevent private companies from rent-seeking through tax incentives. Comment.(250 words)
Why this question
The article discusses the issue of revenue foregone by the government on account of various tax incentives provided to the companies and industries. It is therefore necessary to read the article in detail and discuss why there is a need to and rent seeking on account of such fiscal structure and policy.
Comment- here we have to express our knowledge and understanding of the issue and form an overall opinion thereupon.
Key demand of the question
The question wants us to express our knowledge and understanding as to how various forms of tax incentives promote rent seeking behaviour and add to the revenue foregone by the government. It wants us to express our opinion as to why there is a need to revise such policies and incentives.
Structure of the answer
Introduction– write a few introductory lines about the tax incentives given by the government to the businesses. E.g India provides a large number of tax incentives for different objectives — to promote exports, tax rebate on inputs are provided; to promote R&D etc.
- Discuss the nature of revenue foregone due to those incentives. E.g
- Due to a prevalence of a large number of incentives, there is a difference between the statutory rate of tax and the effective rate of tax.
- The largest source of revenue foregone from incentives offered to businesses is accelerated depreciation.
- SEZ-related incentives form the next biggest component of revenue foregone from corporate taxes.
- There are a number of incentives related to SEZs; however, close to 90 percent of SEZ-related revenue foregone comes from export-promoting incentives etc
- Discuss how it affects the economy and why it should not be encouraged. E.g
- Tax incentives work when their use is properly justified, when they deliver intended short- and long-term results (i.e. attract the right investments and generate social benefits), and when associated costs, both expected and unintended, are economically and socially acceptable.
- There must be rules setting clear criteria for determining which investments and firms are qualified to avail of tax incentives.
- Given the high economic, political and social costs associated with tax incentives, it is essential that tax incentives are underpinned by clear, transparent and credible legal, technical and political processes to deter rent-seeking behaviour etc.
Conclusion– based on your discussion, form a fair and a balanced conclusion on the given issue.