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Assessing taxes PDF Print E-mail
Wednesday, 27 March 2013 00:00
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What, for instance, has changed for the government to consider reducing MAT on SEZs?

 

A few weeks from now, if all goes to plan, the commerce ministry will weigh in on the side of SEZs and argue that at a time when India’s exports are falling, it’s time for MAT on SEZs to be abolished, or at least reduced. Whether the finance ministry agrees or not remains to be seen but there’s a more fundamental question here: how does tax policy in India get determined?

Of course, industry lobbies for tax concessions, but what kind of thought process goes into taxation policy? Take SEZs. There is no conclusive proof that tax breaks for SEZs actually add to investments—the growing size of India as a market, and as a production hub means firms would probably have invested in India anyway—but the government went ahead and cleared the policy. And then, having cleared the policy, it went and imposed MAT on it. What will be the additional exports India hopes to get out of reducing MAT on SEZs, and how does that compare with the tax rebate being discussed? A recent FE report pointed out that of the R3.64 lakh crore exports from SEZs in 2011-12, R2.62 lakh crore came from manufacturing SEZs and two-thirds of this from Reliance’s refinery which the company has partially denotified because it wants to sell locally—in other words, manufacturing SEZs are a dud.

That, surely, is a legitimate question and it’s perhaps time the government began making such analyses part of every major tax change. After all, India gives tax rebates of an amount equal to R5,73,627 crore, or 54%, of its annual tax collections in FY13 and there is no explanation for this. Is the R18,500 crore tax exemption given to hilly states supposed to keep prices down of items manufactured there or is it meant to help industry? Ditto for the R25,491 crore of customs duty exemption for animal and vegetable fats.

This, by the way, is pretty much par for the course in the UK where the taxman puts out tax information and impact notes for most proposals. A note on the increased UK investment allowance has detailed examples of how this will apply to different sizes of businesses and the impact on the budget. This, of course, is what the US’s Congressional Budget Office (CBO) does on most tax policy changes, and over a period of 10 years or more.

India’s tax foregone statement, issued with the budget each year, also has details each year of the taxes given up, but these are not linked to any specific tax policy. More importantly, you want to know about the long-run impact of a policy when it is formulated, not after a year or two when you’ve even forgotten what the tax policy was.

This will help people know what goes into government decision-making, and to counter the usual Left criticism that the government has R68,007 crore to give to the fat cats of India Inc—it’s another matter that this includes various PSUs, who use this to pay an effective corporate tax of 22.2% versus the 32.45% nominal rate.

A good live example of this is the investment allowance introduced in the Budget on February 28. Since India has had investment allowances in the past, what was the reason for why it was withdrawn—and are we now expecting a significant rise in investments because of its reintroduction? And if so, why not extend it indefinitely given India’s aim of increasing manufacturing’s share of GDP from 16% right now to 25% by 2025? Or is it possible, just possible, that one of the things that went into the calculation was that a large part of the rise in investment-allowance linked tax rebate could, in any case, come back through MAT, so it didn’t really matter if such a concession were given?

It’s not just taxes per se, India is coming up with many far-reaching social sector policies and there is an urgent need for CBO-type assessments of their long-term impact. Will the Food Security Bill cost R1.2 lakh crore as the food ministry says it will or R6.8 lakh crore over three years as CACP chief Ashok Gulati says it will. Will Homestead Bill cost R16,000 crore like one calculation suggests or will it cost 5-10 times that amount as one clause in the Bill suggests it might.

The EPFO is not quite a budget item yet, but if it has a hole of R50,000 crore, at some point it will be.

There are lots more such policy items where such clarity is needed, but let’s start with tax policy first.

 
 

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