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21. Consider the following statements regarding Tax Expenditure:
1. 
It is the expenditure incurred by the Government in the collection of taxes.
2. It shows the extent of indirect subsidy enjoyed by the tax payers in the country.
3. Tax Expenditure shows the opportunity cost of taxing at concessional rates, or the opportunity cost of giving exemptions.
Which of the above statement(s) is/are correct?


  1. Only 1 and 2
  2. Only 1 and 3
  3. Only 2 and 3
  4. All of the above


Solution

The correct option is C Only 2 and 3

Tax Expenditures, as the word might indicate, does not relate to the expenditures incurred by the Government in the collection of taxes. Rather it refers to the opportunity cost of taxing at concessional rates, or the opportunity cost of giving exemptions, deductions, rebates, deferrals credits etc. to the tax payers. Tax expenditures indicate how much more revenue could have been collected by the Government if not for such measures. In other words, it shows the extent of indirect subsidy enjoyed by the tax payers in the country.  A statement of the same is presented to the Parliament at the time of Union Budget by way of a separate budget document titled “Statement of Revenue Foregone”. It lists the revenue impact of tax incentives or tax subsidies that are part of the tax system of the Central Government.
Opportunity costs are fundamental costs in economics, and are used in computing cost benefit analysis to achieve a goal. Such costs, however, are not recorded in the account books but are recognized in decision making by computing the cash outlays and their resulting profit or loss.
Whenever a subsidy takes the form of a cash payment or grant to a recipient, it is typically considered a direct subsidy. Any non-cash benefit that a recipient receives that helps it operate or compete is typically considered an indirect subsidy. The benefit is considered to be indirect because its primary purpose may be unrelated to the recipient or not designed for the recipient alone, but provides a significant benefit to the recipient tangentially. For example, a government bailout of the automobile industry is a direct subsidy, while passing a law easing emission standards that has the related benefit of making it cheaper for car companies to manufacture cars is an indirect subsidy. A popular type of indirect subsidy is tax benefit through changing of the tax code.

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