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 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.