These add up to 59% of annual tax collections
While finance minister P Chidambaram has told the taxman to focus on sectors where tax payments are below the average payouts, this is easier said than done. Speaking in the context of corporate tax payments where, against the applicable rate of 30%, the average tax paid is around 24%, Chidambaram said the government could easily get another R30,000 crore if the taxman focused on sectors where the payout ratio was lower than even the average 24% rate. The budget outlines the possible areas of focus. In the revenue foregone statement, it points out that corporates that have a profit before tax (PBT) of more than R500 crore typically pay 22.59% of this as tax; the figure is 24.55% for units in the R100-500 crore bracket versus 26.77% in the case of companies with PBTs of less than R1 crore. Similarly, 69,405 companies of a sample of 4,59,270 accounted for 39.6% of profits for the complete sample, but just 25.53% of the total taxes paid. For India Inc as a whole, the budget says the tax foregone in FY12 was a whopping R51,292 crore on account of lower corporate tax payments. If you look at the sectors, the payout ratio is 19.32% in the case of diamond cutting, 22.07% for power and energy, 13.19% for tea and coffee companies, 21.34% in the case of ITeS-BPO firms, and so on.
While the taxman will look for the obvious frauds of companies overstating expenses to lower profits, it’s worth keeping in mind that many of the companies not paying even the 24% average tax, what to talk of the much higher applicable tax, are doing so because the law allows them to. Total exemptions of all sorts, for both direct and indirect taxes, added up to R5,29,432 crore in FY12, which is around 59% of the gross tax collections in that year. In the ultimate analysis, it will be more important to remove the exemptions and then cut basic tax rates. That, of course, was the philosophy behind the Direct Taxes Code (DTC) brought in by Chidambaram in his previous term as finance minister, and then diluted beyond recognition once he left. It’s time to go back to the original DTC—it had some obvious problems, but those are easily removed.