The reductions implied in the trade-off between exemptions and tax rates may seem rather modest for personal income tax, but it's quite a different picture when it comes to concessions given to corporates. The Budget estimates that the revenues foregone on this account were about Rs 57,852 crore in 2004-05. Considering that the actual revenue from corporate tax in that year was Rs 82,680 crore what that means is that the various sops lopped off about 41% of the government's potential revenues from this source.

If there were no concessions, therefore, the government would have been able to lower corporate tax rates by about 40% of their current levels. In other words, a company that is today taxed at, say, 36% would need to be taxed only at about 21-22% if all exemptions from taxes on corporate profits were done away with.

The problem with the trade-off in both cases, of course, is that those who gain from the lower tax rate are not necessarily the ones who were earlier benefiting the most from the concessions. This means that the change creates not just winners, but losers as well and is hence politically challenging.

There is also the question of whether exemptions actually help to channelise investments and savings in particular directions considered socially desirable. If they do, eliminating them would amount to the government giving up the use of fiscal policy for these ends.