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Economy

Budget 2016: Subsidies like PPF, LPG and Kerosene Have Seen the Not-So-Poor Benefit by 100,000 cr.

100k-cr-subsidy-for-the-rich.png

Subsidies are usurped by the rich, and it goes to say that much of the benefits that subsidies are supposed to provide, happen to be used largely by the rich too.

PPF Subsidized the Rich By 12,000 cr.

Here’s a graphic in the eco-survey about the kind of subsidy that’s been provided to people who don’t really deserve a subsidy:

Subsidies PPF

Look at PPF – the effective interest rate if you assumed both principal and interest were taxed, is 16%, which is a 6% subsidy. On the total amount, that’s about 19,182 cr. but we take only 62% of this figure, as about 62% of people who file 80C claims are people earning more than 4 lakh per year.

This is a little shady because the really poor won’t even file tax returns, and they may still have a PPF account. 

The only solution, of course, is to make PPF taxable in some way or the other, I supposed. Taxed at exit through an EET regime would probably be one way to go.

Effective Subsidies to the Rich More than 100,000 crores!

A trillion rupees – 100,000 crores – of what subsidies are meant for the poor are used by the rich, apparently.

100k cr subsidy for the rich

 

Here the rich are not necessarily “rich” in the sense that they have too much money. But they are rich in the sense that they are above poverty levels, and that the subsidies created targeted only people below these poverty levels but were available to everyone.

Gold here is basically considered as a lower taxed item at compared to a 26% tax on other goods. Railways subsidy uses the ratio of unreserved (poor) to all other reserved classes (rich). ATF taxes of 20% are lower than the taxes on petrol/diesel, and it’s effectively a “rich” subsidy. 

These are all a little shady, in my opinion, in the sense that the reason you don’t tax gold is because it’s an investment, not a product. Or the Railways or ATF which is not a big deal in the larger scheme of things, with the railways actually charging higher for A/C levels than costs. 

Electricity subsidy is based just on two states – Delhi and Tamil Nadu – where they assume lower consumption patterns for the poor. This also makes no sense because the lower consumption invites lower bills; at best this figure includes the lower slabs for the higher end consumers. They have extrapolated this for the whole country but I don’t think you should ever use Delhi data to represent anything beyond the borders of that city. 

LPG and Kerosene are fair arguments.

Overall, this shows you the level of subsidy that exists. If you removed this subsidy – or somehow changed it so that your PAN number would be used to check if you have paid tax on income> 4 lakh and then removed you from the subsidy – then patterns of usage will change dramatically. And that would not result in anywhere close to this number.

For example if you said I had to pay full electricity price right from the first unit, I would reduce my electricity usage. If you taxed gold at 26% India wouldn’t see official gold usage at any level compared to current. And so on.

But the tone of this argument seems to suggest that the government might be in favour of:

  • Targeted subsidies (like they did with LPG, only to bank accounts)
  • Removal of exemptions (from stuff like PPF)
  • No increase in exemption limits (so only the poor benefit)

Let’s see how the budget works on Monday. 

  • pam says:

    If they base this on income tax then would it not affect only the salaried class who pay taxes properly. Whose numbers are anway too small.

  • Karthikraja says:

    What happens? Your articles assumes that we are in developed nation. We are still in developing country. We need to march towards for it by making proper reforms and governance.

  • Sundar says:

    Funny arguments:
    1. PPF should be compared to 10 year bonds and not with PO savings.
    2. Gold is a cultural asset even used by poor for jewellery in our system. Further it acts as a Hedge against debasement of Rupee by reckless Govt. Further poor get emergency loans from gold when they are cut off from mainstream banking.
    3.Electricity subsidy beyond 100 units should be done away.
    4. LPG for higher rich (piped gas) is far cheaper than cylinders.
    5. Kerosene subsidy should continue as it is actually used by majority of poor.

  • Paul says:

    The LPG subsidy was a women empowerment subsidy – It brought down cooking time and brought many women to employment/productive labor. Making energy expensive will cause alternate use of energy, which takes up human effort, directing it to less productive utilization.
    For Public provident fund, it is a provident(for future) fund. In fact a retirement tool for people. An expense today for the government is saving the government from social security spend that may incur in future.

  • Ashish says:

    If tax PPF, why leave CPF out! Tax all the PF documents equally. Do the PF investors constitute the richie rich, or are a majority of them members of the middle class? What about organizations that don’t pay CPF to their employees, thereby forcing the latter to go for PPFs. We live in a funny country indeed! Who, after all, conducted the recent Economic Survey?

  • Shankar Balan says:

    There should be a provision for persons aged above 60 to withdraw PPF without waiting for teh 15 year lock in.

  • inderjeet says:

    The proposed tax on PPF is wrong and against the very basis of its existence, this was done to attract from market and investment, if you compare with new system of taxing it then it should be for new accounts and for extensions after 2016 april and not retrospective. and it will be noticed there wont be any new accounts or extensions after april 2016, as the interest in fd will be higher and can be withdrawn as and when required.