What do you understand by Tax expenditure? Comment on its relevance? ( Economy)

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Tax expenditure is the revenue foregone as a result of exemptions and concessions. Tax expenditure was introduced for the first time in 2006-07 union budget.  Tax expenditure is justified on following grounds:

  • Act as an incentive for priority sector like infrastructure.
  • It promotes balance regional growth
  • It neutralise the disadvantage on account of location
  • It provides opportunity to new industries to grow
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and flourish.

 

But tax expenditure has its own demerits. As it leads to:

 

  • Multiplicity of tax rates.
  • Complex taxation system
  • Litigation increases and it leads to increase in disputes.
  • Absence of sunset clause lead to its perpetuation
  • Can distort resource allocation and stunt productivity
  • Decrease in the quantum of revenue.

 

 

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