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Are you listening, Mr Jaitley? Tax reforms, ease of doing business can kick-start economy

India inc can get away paying little or no taxes as the government itself provides loopholes

Mumbai: Union Finance Minister Arun Jaitley on Tuesday said he favours controlling fiscal deficit through expansion of economy and tax buoyancy rather than contracting expenditure. This should be music to the ears of India Inc. Everyone whether chambers of commerce, trade and professional associations or individual companies have been demanding cut in taxes to help them grow and compete. So whilst Mr Jaitley may not cut taxes it looks like he may not raise any new taxes. He will really be walking a tight rope waiting for the economy to pick up and then cashing in on the tax buoyancy.

Taxation in recent budgets has almost become a charade. If one goes by the government's own statements on revenue forgone (which comes along with the budget papers) by way of various forms of concessions one will be shocked.

India inc can get away paying little or no taxes because the government itself provides a lot of loopholes like special tax rates, exemptions, deductions, rebates, deferals and credits. It is amazing that India Inc thinks that the corporate sector is the highest taxed in the world and this is facetious. Because the effective tax rate after all the deductions etc comes to barely 25 to 26 per cent!

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All these concessions are given in the name of incentives to do business and be competitive perhaps. In 2011-12 the revenue foregone was a hefty 67.7 per cent of the aggregate tax collection for the year 2011-12. In terms of money it was Rs 5.3 lakh crores!

A break up of this figure reveals that under corporate tax it was 19.1 per cent or Rs 61,765 crore; under excise duty it was a massive Rs 1,95,590 crore or 134.3 per cent which was more than the actual duties collected. Similarly under the customs duty heading the revenue foregone was a huge Rs 2,36,852 crore or 158.63 per cent.

Consider the fuss that is being made over NREGA and other subsidies which is nowhere near Rs 5 lakh crore!!

And as Rohit Sinha, then a research scholar at the Centre for economy and Development at the Observer Research Foundation, wrote some time ago, in the case of corporate tax "the effective tax rate (the rate after the deductions/exemptions) decreased in reverse proportion to the total profits. The smallest companies (Rs 0-one crore) had an effective tax rate of 26.26 per cent while the largest companies (over Rs 500 core crore) enjoyed an effective tax rate of 21.67 per cent."

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What's more as he points out in the case of customs duty, the largest share of customs duty foregone Rs 65,975 crore or 23 per cent is the commodity group of diamonds and gold! This is surprising particularly in the case of gold he said, "considering that the government left no table unturned to limit gold imports in order to control the current account deficit." In 2012-13 the estimated amount of customs duty foregone for diamond and gold would be Rs 61,035 crore or 20.5 per cent of the total customs duty foregone.

Mr Jaitley would do well to look into this and if there are two things that cannot wait if the economy is to see some investment they are: One is to quickly see how the ease of doing business can be put in place and secondly to get going on tax reforms and rationalisation of all these hidden subsidies. Are u listening Mr Jaitley?

( Source : olga tellis )
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