Economic Survey 2015-16: Bounties for the Well-Off {Chapter Summary}
The government spends nearly 4.2 per cent of GDP subsidising various commodities and services. These subsidies help not just poor but also well-off people.
How Small Savings Schemes hinder monetary policy transmission?
Small savings schemes offer high and fixed deposit rates (within year) and compete with banks, it is difficult for banks to reduce their own deposit rates and hence pass on policy rate cuts to consumers in form of lower lending rates. Recently, the government has reduced rates on some small savings schemes to make them more responsive to market conditions.
What are the available Small Savings Schemes in India?
- Post Office Savings Account
- Post Office Savings Time Deposit
- Post Office 5-year Time Deposit
- Post Office Monthly Income Account Scheme
- Senior Citizen Savings Scheme
- 5 Years National Savings Certificate
- 10 Years National Savings Certificate
- 15 year Public Provident Fund Account
- Tax Free Bonds
The interest rates on most of these schemes are fixed (for year), but they vary in magnitude and periodicity. Actually, the PPF is “not-so-small” and the tax-free bonds are “not-small-at-all”. The PPF and tax-free bonds benefit more to well-off people.
What is the tax-treatment for Small Savings Schemes?
Ideally, savings schemes should be taxed according to the “EET principle”. The first “E” stands for tax exemption of the contribution, the second E for exemption of interest income, while T stands for taxation of the principal (and interest) when it is withdrawn.
But the Small Savings Schemes in India have the following tax treatment:
- Post Office Savings Account – TTT
- Post Office Savings Time Deposit – TTT
- Post Office 5-year Time Deposit – ETE
- Post Office Monthly Income Account Scheme – TTT
- Senior Citizen Savings Scheme – ETE
- 5 Years National Savings Certificate – ETE
- 10 Years National Savings Certificate – ETE
- 15 year Public Provident Fund Account – EEE
- Tax Free Bonds – TET
What is the problem with PPF scheme?
The effective returns to PPF deposits are very high, creating a large implicit subsidy which accrues mostly to taxpayers in the top income brackets. The magnitude of this implicit subsidy is about 6 percentage points – approximately R12,000 crore in fiscal cost terms.
What is the problem with tax-free bonds?
Since there are no limits on permissible contributions (other than that dictated by the supply of such instruments) to the tax-free bonds, the main beneficiaries are large savers who can set aside large amounts.
How gold is a strong demerit good in India?
The ‘rich’ in India consume most of the gold (the top 20 per cent of population account for roughly 80 per cent of total consumption) and the poor spend almost negligible fraction of their total expenditure on gold. Yet gold 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. About 98 per cent of the subsidy on gold accrues to the better-off and only 2 per cent to the bottom 3 deciles.
How LPG subsidies are helping the well-off?
LPG consumers receive a subsidy of Rs. 238.51 per 14.2 kg cylinder (as in January 2016), which amounts to a subsidy rate of 36 per cent (ratio of subsidy amount to the market price). It turns out that 91 per cent of these subsidies are accounted for by the better-off as their share of consumption of LPG in the total consumption is about 91 per cent; while the poor account for only 9 per cent of LPG consumption and hence only 9 per cent of subsidies go to them.
How subsidies on aviation fuel are helping the well-off?
Aviation fuel is taxed at about 20 percent (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). The real consumers of ATF are those who travel by air, who essentially are the well-off. Hence there is an implicit subsidy for air passengers (the difference between taxes on diesel/petrol and aviation fuel) amounting to about 30 percentage points.
