Income Tax Concessions

Income Tax Concessions V N Kothari R H DHOLAKIA and B H Dholakia (EPW, July 18, 1987) have raised questions about the conclusions reached by me (EPW, February 21,1987) in regard to extending and widening of income tax concessions on investments in specific financial assets. According to them, I have reached very serious conclusions on the basis of a broad analysis of income tax revenue/GDP ratio and some limited hypothetical arguments. Secondly, according to them, I have totally ignored the possibility that the taxing authority can have, besides equity, a variety of other objectives, Thirdly, the full or partial exemption of interest income, that I recommend is regressive, unsound and not conducive to the growth of receipts to the government as compared to the present policy of income tax concessions on principal amounts invested in financial assets. Fourth, according to the authors, from the long-run dynamic point of view, the policy of granting income tax concessions on the principal amount would lead to a steady and continuous stream of new investments through declaration of hitherto concealed incomes, without requiring a steadily rising limit of tax concession. On the other hand, my recommendation.of tax exemption of interest income would require a steadily rising limit of exemption to achieve the same result. This would adversely affect the future growth of the tax base. Therefore, according to the authors, my analysis is not valid and the existing policy of granting tax concessions on investment in specified securities is sound, prudent, equitable, less costly and conducive to the future growth of the tax base. Objections raised by the authors, offer me as opportunity of clarifying and elaborating my view point. Also in the process, I adduce fresh arguments.