Time to do a SWOT analysis on the huge giveaways
Given prime minister Narendra Modi’s Make-in-India programme, chances are the budget will have a raft of incentives for the manufacturing sector, more so given how its growth has slumped to a mere 1.1% in the April-to-November 2014 period. To begin with, of course, there will almost certainly be a correction in the inverted duty structure that, for instance, is a factor behind India’s burgeoning imports of consumer electronics—in several areas, inputs pay higher import duties than the finished products do. But more than that, chances are the budget will have some relief on the minimum alternate tax (MAT) as well as the dividend distribution tax (DDT) on SEZs and their giant successors, the National Investment and Manufacturing Zones. When they were planned, SEZs were meant to be an export enclave, completely duty-free as well as tax-free—100% for the first 5 years, 50% for the next 5, and an amount equal to the reinvested profits for the next 5. But with, over the years, successive finance ministers increasing levies on them, along with the problem of acquiring land, SEZs haven’t taken off as well as envisaged—of the 564 notified, only 192 are operational. But in even these, investments have risen from R4,000 crore to R3 lakh crore and employment from 1.4 lakh persons to 12.8 lakh between February 2006 and now.
While more tax sops for SEZs may be justifiable, tax sops have become so large—18.5% of total collections for direct taxes and 88% for indirect taxes—finance minister Jaitley would do well to see if they make economic sense and whether they have resulted in any significant step up in production. In the manufacturing sector alone, these added up to R1.96 lakh crore in FY14 while the excise collections in that year were a lower R1.79 lakh crore; at R2.66 lakh crore, similarly, customs duty exemptions outweigh customs collections of R1.75 lakh crore. A lot of these tax exemptions may well be worth it, and they may even be incorrectly calculated—if R100 is seen as a tax sop for SEZs, the question to ask is whether the SEZ would have come up in its absence; and if it would not, where is the question of any tax loss? While it is critical that a cost-benefit analysis be done of each major tax giveaway—why should all such exercises only apply to subsidy expenditures?—there is another important reason why the budget needs to do such an exercise. If most giveaways were done away with, and tax rates lowered significantly—the increased compliance would actually reduce the tax losses anyway—wouldn’t this benefit industry more? All of this can’t be done in one budget, but the chief economic advisor would do well to get started in a few areas to begin with.