The Tax Expenditure (TE) is a concept that represents the revenue forgone by the government due to preferential tax treatments, which function as an implicit subsidy to achieve specific economic or social objectives. It is not a tax itself, but the cost of deviations from the standard tax structure, such as exemptions, deductions, rebates, or preferential rates.
The formal reporting of this concept in India originated with the Fiscal Responsibility and Budget Management Act, 2003. The government began publishing the TE figures annually in the Union Budget starting in 2006-07 to enhance transparency regarding the cost of tax preferences. This disclosure is currently presented as the Statement of Revenue Impact of Tax Incentives under the Central Tax System.
Tax expenditure works by incorporating specific provisions into tax legislation, primarily the Income Tax Act, 1961, and the annual Finance Act. For example, the deduction allowed under Section 80C for investments in instruments like the Public Provident Fund (PPF) is a TE, as is the lower GST rate on essential goods. The overall TE of the Union government has seen a decline, falling from 8.15% of GVA in 2008-09 to 1.69% in 2019-20. However, the introduction of the concessional tax regime in 2019 led to a subsequent increase in the revenue forgone. The introduction of the Goods and Services Tax (GST) in 2017 also significantly altered the indirect tax structure, impacting the assessment of indirect tax expenditures.