Saturday, July 09, 2022

Subsidies vs Incentives

In Jan 2016, Modi questioned, why benefits given to poor people are called subsidies, and why benefits given to rich, like exemption on dividends and long term capital gains are called as incentives?

When something is given from the treasury of the government, that is called subsidy. 

When something may or may not come to the treasury, and the Government decides to not take it, it is called incentive. 

When the government removes subsidies, the government will save the equivalent money in their treasury. 

But, when the government removes incentives, they may not save the equivalent money. Some businesses or transactions might be running only because of that incentive. Once the incentive is gone, they may not do that business or transaction. The resultant money that the government would get after removing an incentive is always less than the incentive amount that the government projects. 

Exemption on dividends and long term capital gains were not at all incentives. It is just that they were taxed in a different way. 

Companies pay tax on their profits. After paying the tax, they used to pay dividend distribution tax again, and then they distribute the dividend. Once the dividend comes to the investor, the investor does not need to pay any tax on that [It was already taxed twice.] Modi called it an incentive, because you are not paying the tax third time [For the exact same amount which is already taxed twice].

Couple of years back, Modi's government removed the dividend distribution tax and made the dividend as taxable for the investor. Dividend is coming out of the profit that the company made. Company already paid the tax on the profit that it got. You are paying the tax a second time, because it changed hands. 

Before 2004, Long term capital gains in equity were not exempted from income tax. After Chidambaram became finance minister, he exempted tax on the long term capital gains in equity, and introduced securities transaction tax. 

Modi removed the exemption on the long term capital gains in equity and kept the securities transaction tax. [Again double taxation].