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Don't piss on the rich PDF Print E-mail
Friday, 26 February 2016 00:00
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It’s fashionable, but incorrect, to say the rich avoid taxes, get too many tax breaks and don’t create jobs

 

It is not clear whether the budget will address the issue on Monday, but there is a view—particularly among senior members of the BJP—that the rich are a pampered lot; as individuals, they don’t pay taxes on their dividend incomes or on capital market gains and, as companies, they get way too many tax benefits and, in any case, do not create enough jobs to justify this largesse.

That is why, for instance, prime minister Narendra Modi said that while corporate tax giveaways were Rs 62,000 crore in FY15, this did not include the benefits the rich got by not paying taxes on dividends or on capital gains they made in the stock market. As this newspaper has pointed out earlier, the prime minister was badly briefed since India Inc paid nearly R26,000 crore as dividend tax in FY14 on behalf of their rich shareholders—just because dividend is taxed at the hand of the company and not in the hands of the shareholders doesn’t mean that dividends are tax-free. That, in itself, works out to over a tenth of the personal income tax in the year—and the securities transaction tax paid in lieu of capital gains was another R6,000 crore in FY15—but these numbers are never totted up in this fashion.

Of the roughly Rs 3 lakh crore of personal income taxes, as much as a seventh comes from just 83,000 people earning over Rs 50 lakh a year, according to a calculation done by Surjit Bhalla based on the taxman’s data; those earning over Rs 10 lakh a year are around a tenth of the taxpaying population but contribute more than half the income tax collections. If that’s not the rich paying their dues—more than it actually—it is not clear what is.
As for the tax giveaways to India Inc, they have been given for a purpose, to encourage firms to invest in India. Around Rs 37,000 crore of this, or around 60%, is accounted for by accelerated depreciation which, anyone who understands taxation knows, means the tax paid by the company over a 5-7 year period remains unaffected, it just gets lowered in the first few years of a plant being set up and is critical in terms of helping finance the project through internal accruals.

You can argue, and rightly, that firms shouldn’t require sops to invest but sops are given for two reasons—one, they are meant to compensate for the inherent problems of investing in India in terms of delays in getting land and permissions, poor infrastructure, etc; two, they are meant to ensure the effective tax for corporates in India is not too different from that in competing investment destinations. That, of course, is why finance minister Arun Jaitley is trying to reduce corporate tax levels to 25% from the current 30%, while reducing all tax giveaways. If, for the sake of argument, there were no tax sops, given the difficulties associated with investing in India, it is possible many firms would relocate to South East Asia or China. In other words, the government is giving the sops only to ensure there is a Make-in-India—it is not doing India Inc a favour.

It is also important to point out that the tax giveaways to corporate India are around a third of those given on excise duties—the former equalled 14.6% of total corporate tax collections in FY15 and the latter totted up to 100% of total excise collections. Ostensibly, excise duty concessions are also given to producers, but the sole purpose of these is to lower prices for consumers—sadly, the budget does not give a detailed break-up of excise giveaways for a more elaborate examination of which consumers were pampered most. Corporate tax giveaways, to give a different perspective, are also much smaller than the Rs 150,000 crore or so of annual theft that takes place in so-called schemes for the poor, and the largest beneficiaries of this are the political-bureaucratic class.

It is also worth keeping in mind that while total capital investment across the country in FY15 was Rs 38 lakh crore, Rs 15 lakh crore of this came from the private corporate sector—and a sixth of this was accounted for by just the top 25 companies (excluding banks which do not, by definition, invest).

Indeed, while the government has managed to reduce all the good work done by telecom companies to just one issue of call-drops, without paying any attention to the huge spectrum shortage that is responsible for the call-drops, the fact is that just three telcos—Bharti Airtel, Vodafone and Idea—invested Rs 35,000 crore in capex in FY15, and that’s not counting the R85,000 crore that they bid for spectrum in that year. In this list of the top 25 firms, just one company, Reliance Industries, according to its chairman’s statement, invested R1 lakh crore in FY15—and that’s after, thanks to the government not allowing free-market prices for natural gas, the company lowered its investment in gas exploration.

Reliance Industries, interestingly, also accounts for 14-15% of India’s exports. Another company, though not in the top 25, Cairn India, accounts for roughly a fourth of all the crude oil production in the country. The top 25 firms also account for close to 16% of the total corporate tax collections in India.

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Collating data on the employment by each firm is difficult, but a recent ICRIER study showed that, thanks to the faster growth of capital-intensive industries—that is what India Inc is mostly about—the growth in employment in these industries was faster than in labour-intensive sectors. In any case, it is only modern industry that is globally competitive—in a globalised world, if Indian firms are not competitive, imports will take over the market. The government may wish to favour labour-intensive manufacturing, but if it is not globally competitive, there are going to be no jobs—they will be created in China, or Vietnam.The government, naturally, is free to do what it wants in the budget, and move the so-called incentives away from the corporate sector—or fail to make any serious moves in stopping tax-terror —but it has to be keep in mind that, in an era when capital is mobile, the only loser will be the country.

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