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Annexure - 2.
TAX EXPENDITURE
A Note on Tax Expenditure
Tax expenditures are provisions in the tax code, such are exclusions, deductions, credits, and deferrals that are
designed to encourage certain kinds of activities or to aid taxpayers in special circumstances. When such provisions
are enacted into the tax code, they reduce the amount of tax revenues that may be collected. In this sense, the fiscal
effects of tax expenditure are just like those of direct government expenditure. Some tax expenditures involve a
permanent loss of revenue, and thus are comparable to a payment by the government; others cause a deferral of
revenue to the future, and thus are comparable to an interest-free loan to the taxpayer. Tax expenditures include
exemptions from the tax base, allowances deducted from gross income, tax credits deducted from tax liability, tax
rate reductions, and tax deferrals (such as accelerated depreciation). Since tax expenditures are designed to
accomplish certain public goals that otherwise might be met through direct expenditures, it seems reasonable to
apply to tax expenditures the same kind of analysis and review that the budget appropriation receives.
It is essential to distinguish between those provisions of the tax code that represent tax expenditures and those that
are part of the “basic structure” of a given tax. The basic structure is the set of rules that defines the tax; tax
expenditure is an exception to those rules. In general, most taxes have a series of features that define their basic
structure. These features are a base on which the tax is levied, such as net income or a particular class of
transactions; a taxable unit, such as a person or a corporation; a rate, to be applied to the base; a definition of the
geographic limits of the state’s exercise of its tax jurisdiction; and provisions for the administration of the tax.
The total expenditures for FY 2005-06 has been estimated to be around 24.9 billion, which is about 12% lower than
the previous year mai