Inclusive Growth and Differential Taxation

The 2014 riches-list of Forbes proudly embraces three Indians.On the contrary, the UN’s list of all countries by Human Development Index has India at the 135th position, while Sri Lanka, Japan, China, Singapore, and Maldives are way above.Inclusive growth may be the target of the new government; however would remain unaccomplished unless one critical concern is paid heed to- Equal distribution of national income.Herein too, the foremost target is to bring as much money as can be possible under the state-revenue basket, which is the solesource of distributing income equally and unbiasedly among various clusters of the society. Of course, you cannot expect private income earners to participate in nation’s development else for contributing by way of taxes on their incomes. Revenues from taxes can be regarded as earned income of government as servicing liabilities are not attached.

In this context, let us leave the income tax levied on individuals (salaried persons) for the matter that they are least exposedtowards tax evasion. Next is the agricultural income that is exempt by virtue of Section 10 (1) of the Income Tax Act, 1961.Tax on corporates is what I would link with inclusive growth in the subsequent paragraphs. In India, the corporate tax rate for domestic companies is 30 per cent, while for foreign companies the same is 40 per cent. Thereafter, we have provisions for MAT (Minimum Alternate Tax), CENVAT, Custom and Excise Duty, Service Tax, and VAT; however I will stick to basics. Now prior to analyzing the corporate taxation regime of India, let us see some global aspects. In the U.K., for profits up to £300,000, applicable rate of tax is 20 per cent, which enhances to 21 per cent for profits above £300,000. In the U.S., federal tax rates oncorporates vary from 15 per cent to 35 per cent.

Why there exists a tax differential in the U.K. and U.S.? In the U.S., for corporates with taxable income not over $50,000, the applicable tax rate is 15 per cent. When you will compare the corporate taxation rates globally, India will emerge as one of the uppermost tax-levying nations. While in most of the economies the rates of corporate taxes saw a decline from the period 2006-2014, we haven’t made any such variations. Registered companies have been paying the ever-high tax on their revenues, no matter whether the corporate is a high risk and low revenue business (Leather Tanning and Commercial Banking), or a low risk and high revenue business (IT and BPO services). While on one hand, the new PM is making every endeavor to boost the manufacturing sector, are they considering the impact of equivalent rates of taxation on all corporates; high-risk, low-risk, high-revenue, or low-revenue business activities?

My purpose of writing will become much clear with the following facts. The share of our manufacturing sector in the GDP is just above 15 per cent, while that of the services sector is above 57 per cent. Agriculture remains source of income for more than 50 per cent of our population; however the remaining 50 per cent is divided almost equally among the manufacturing and services sector. Another fact is that while the services sector employs people with specialized skills (engineering, banking, communication); the larger chunk (those from rural parts) is absorbed by the manufacturing sector. Ranging from high interest rates capping consumers’ spending to past government’s sluggish decision-making, one key bottleneck of the manufacturing sector is the ever-high tax rates, whether or not the operating risks/ revenues are high or low. Having stated the manufacturing sector as the Achilles wheel of Indian economy in his interim budget speech, the former FM overlooked theinfluence of taxation on this sector.

On the contrary is the services sector, being precise the IT and BPO sector. The IT and BPO services sector of India recorded a revenue of above USD 109 billion in the FY 2012-13 and is expected to fetch a combined revenue of USD 300 billion by 2020. The sector accounts for 8.1 per cent share in the national GDP and holds largest share in total services export. Plus, IT-BPO is the largest private sector employer and fourth largest in terms of employing women from urban areas. By 2020, the sector is anticipated to count for 18-20 per cent of India’s total exports and more than 10 per cent in terms of contribution to GDP. The sector also accounted for more than 10 per cent of country’s total FDI in the last decade, as per NASSCOM. When the numbers are analyzed in light of India’s economic growth in the past years, the sector stands at top of the list, hence it is expected by many experts that the government should ease ways further for the evolution of the sector in the coming days.

The preceding paragraph tasks much about the countable share of IT and BPO sector in India’s economic evolution. However, when the former FM mentioned the expression ‘manufacturing’ 15 times in his hour-long interim budget speech, it became quite clear that the economy cannot stand even for a day in case our manufacturing is superseded by the services sector. Though as a general rule of economics, the share of services in the GDPescalates with the pace of development, China was an economy that could bear the recent economic slowdown on the shoulders of its manufacturing sector that contributes more than services in China’s GDP. It is evident then that unless the pillar of manufacturing is rendered requisite vigor, India cannot expect a stable economy that is equally prosperous for all Indians. Sad to note, industrial production in India has been sinking since long. The same contracted 0.6 per cent during April-December, 2013-14.

It is now time to boil down to the heading ‘Inclusive Growth and Differential Taxation’. When it is quite visible that no twosectors or for that matter no two businesses in the same sector have exact resemblance, how can the taxation regime treat them alike? For instance, the IT and BPO sector can thrive without any need for inventories, hefty corporate loans, and substructure to undertake production or to store goods. All these are, however, an essential for most of the manufacturing sector industries. Plus, similar to the rule for individuals andproprietorships, where tax structure is linked with volume of earnings; the government will need to consider levying ofcorporate tax basis the volume of revenues earned from operations. It is hard to understand the intents of our tax structure that has no rebates for small businesses; however offers tax deductions to large players in form of CENVAT, STPI (100 percent tax deduction on profits under Section 10A and Section 10B of the Income Tax Act), and SEZ scheme.

‘Inclusive Growth’- The honorable Supreme Court has held that the principal aim of a socialist state is to eradicate inequality in income, status and standards of life. The basic frame work of socialism is to provide a proper standard of life to people, especially, security from cradle to grave. It is to be noted that while the farmers of U.P., Bihar and Maharashtra were committing suicides, and workers of manufacturing concerns were protesting against closures, employees of the IT and BPO sector spent INR 76,000 crore in the FY 2009, of which INR 6000 crore were spent on telecom facilities and INR 7400 crore were expended on hotel and tourism (NASSCOM’s report).Such wide distinction in lives of Indians is something that our Constitution forbids. Herein, our taxation regime can play a key role. By extracting excessive money from the pockets of hefty corporate houses, funds can be allocated to schemes aimed at rural, women, education, and infrastructure expansion- Thus ensuring equitable distribution of resources and income.

Extreme mention of the IT and BPO sector in my writing in no way means delegating the burden of heavy taxes on the shoulders of this industry. Reports reveal the decline that this industry has lately seen as an outcome of competition andregulatory hurdles for offshoring. Rather, the Finance Ministrymust form a committee to study the pluses and minuses of taxation structure of the U.K. and U.S. Also, the impact of our rigid tax regime on various sectors of economy, along with on distinct industries in same sector has to be assessed in light of the fact that unless the burden of above-30 per cent tax rate isdetached from the shoulders of small entrepreneurs, innovation and risk-taking capability cannot be rewarded. The ‘Make in India’ expression of the new PM says it all about his courtesy forthe industrial sector. However, unless the tax regime is renderedpositivity, inclusive growth and robust manufacturing sector will be far than attainable.

122 thoughts on “Inclusive Growth and Differential Taxation

  1. Satbir Singh Bedi

    It is not a question of percentage of tax levied but the question of its recovery. Here I may mention that during my career in Government service , I had studied the working of the Inspectors of Income Tax, Customs and Central Excise as well as the working of the Enforcement Officers of the Directorate of Enforcement. I had found that they either hardly worked for the day or they worked only to collect bribes from the tax evaders so that they could fill their coffers. In Focus Even the file Numbers and subjects on the files were given by the agents who paid them bribe money. There is a huge number of Income Tax Officers, Income Tax Inspectors, Customs Officers, Central Excise Officers and Enforcement Officers but they hardly work. I had thought that Modi would put them to work and ask them to conduct raids for recovering the taxes that were not paid but this is not happening. Now, there is a large fiscal deficit. If Modi wants to wipe out this deficit, he not only needs to disinvest in the Public Sector but also has to order raids to be conducted so that there is no tax evasion and tax money can be recovered. The money recovered can be used for development of the country and for undertaking projects that would produce employment. He should also go in a big way to bring in foreign investment. All this should make India prosperous

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  18. Sanjay Kumar Tyagi

    I am running a small business. Loan from bank has monthly instalments. Even tax has the same liability. But no guarantee for profits. Why cant government charge more from those who work at great margins.

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