Assignment 2

Corporate Karzaa Maafi

Submitted By: Amanjot Singh
Roll no. : A006



Since 2011-12, Indian economy is showing all sorts of symptoms of
macroeconomic illness, high unemployment, double-digit inflation, high
fiscal deficit, sky touching interest rates and policy paralysis. When
P. Chidambaram joined the office in August 2012; he asserted that his
biggest challenge is to contain the high fiscal deficit. To curb the
widening gap between government expenditure and revenues, the
Finance ministry reduced the subsidies for fuel and fertilizers. While the
subsidies to the poor were dwindled, it didnt prevent the so called
aam admi government from lining up big business houses pockets. It
seemed hypocritical on the part of UPA led government when one
closely analyzes the facts. In 2011-12, the government had spent
approximately Rs. 1.54 Lakh crores on subsidies to farmers and poor
people, which included subsidies on food, fertilizers, petroleum and LPG.
But in the same year, the exemptions to corporate houses and rich went
up to Rs. 4.60 lakh crores.

The current taxations laws in India involve some exemptions, rebates or
tax preference for particular individuals, enterprises or companies for
different reasons. The Finance ministry of India acknowledges that,
these tax preferences can be seen as an indirect subsidy to selected
taxpayers. The reason for giving these subsidies can be several like
encouraging individual savings, offering boost to export sector, for
balanced regional progress, infrastructure improvement, increasing
employment opportunities etc. What we can infer from it is that-These
exemptions and superfluous tax breaks to corporates leads to loss of
public revenue, which could have been collected.

The evaluation of this revenue foregone in the central tax system have
received the attention of various stakeholders over the past few years
and Since 2006-2007, the Ministry of Finance has been publishing
estimates of the revenue sacrificed (foregone) because of the tax
concessions and so called corporate subsidy.





For 2012-13, the revenue foregone have been evaluated at a total of
Rs. 5,73,627 crores which is 5.73% of the countrys GDP and ten percent
greater than the total fiscal deficit of our nation.

The proportion of tax revenue sacrificed is the highest in case of
exemptions in Custom duties (44% of total revenue forgone), followed
closely by rebates in Excise duties (36%). Concessions in Corporate tax
have amounted for 12% of the total revenue forgone and Personal
Income tax exemptions accounted for the least 8% for the year 2012-13.




Revenue Forgone (in Customs Duty, Excise Duty, Corporate tax and
Personal Income Tax) as % of Total Revenue Forgone in 2012-13


It is also interesting to know that what is the total revenue that is
forgone under corporate income tax, customs duty and excise duty sums
up to since 2005-06. According to Indian Government it is only
Rs, 21,25,023 crore. This amount is bigger than the Indias tapped black
money in foreign bank since 1948 (470 billion) as estimated by the
Global Financial Integrity. This loot has taken place in last 8 years.

On an average, the Union budget writes off Rs. 240 crores every single
day in corporate Income tax. Between 2005-06, thee Indian Government
wrote off corporate income tax of nearly Rs.3,74,937 crores. This is the
amount, which the big boys of the corporate India are exempted to
pay. The numbers are shocking. It bothers me that such gigantic amount
of money is not collected every year and while writing off this mammoth
amount sum for corporate, the government slashes budgets thousands
of crores from other priority sector like agriculture. And I feel deceived
when I see that while planned expenditures are falling short of funds,
expenditure in social schemes like MGNREGA is cut, at the same time
the pockets of already rich corporates houses are filled. The burden of
this revenue forgone is passed to the citizens of this nation. For
example, in 2011-12, there was shortfall of Rs. 30,000 crores because of
low corporate tax collections. So despite charging the rich and
corporates, the government in their budget increased the general excise
duty and service tax by 2 per cent.

One of my major concerns for providing all these subsidies to corporate
sector is that they will make industries more dependent on government
subsidies and at the same time lowering of fiscal deficit will be a very
difficult task.
It is generally seen that that the tax cuts by the governments are either
saved or used as payment of debts. They are not spent. In my view, in
spite of that, direct infrastructure spending is a better option. It has a
multiplier effect on the economy plus it creates public assets, which the
government has to anyway provide. Even the studies shows that these
tax breaks are inefficient. For example In a study conducted by the
Economic Policy Institute in the USA, it was found that tax cuts to
corporates are among the least productive and uneconomically
inefficient of fiscal stimulus approaches. It was found that direct cash
benefits and food stamps to the poor bought the biggest bang for the
stimulus. Infrastructure spending and assistance to states followed it.

In India, fiscal stimulus measures objective is to manage the supply side
that includes direct and indirect spurs to the manufacturers and
suppliers. This is in sharp contrast with the mature economies like US
where the objective of similar fiscal stimulus is to manage the demand
side so as to use the unemployed resources and encourage optimal
utilization and increase the disposable incomes of the citizens who will
spend that money and the economy will grow

It is often claimed that the revenue-foregone say on excise duty
translates into lesser prices for the consumers. However, there exist no
evidence that this has really happened. The benefits that are accruing to
the general public are not mentioned anywhere. Not even in the budget.
The only thing, which is visible, is the benefits to the industries and
businesses.












The government must understand the need of the hour, for example, till
last year when India wanted FDI, tax breaks must given to foreign
companies only to encourage them rather than IT companies who are
already earning so much. Looking at the optimistic side, Finance Ministry
is trying to regulate the revenue loss. One of the examples that can be
given is that of tax breaks in HP, Uttarakhand. In 2003, the central
government, in order to spur industry in the two states, announced a
package for private companies. Under this package, fiscal incentives like
100% income tax exemptions for 5 years and subsequently 30% for
companies plus 100% excise exemptions for 10 years were guaranteed.
This hill-side package got expired in 2010. When the Commerce ministry
tried to revive this package again. The finance ministry rejected the
proposal saying that the revenue foregone was very high.

The relevant arguments recommend that the tax
concessions/deductions/ rebates need to be minimized prudently
designed and must be justified with appropriate social and economic
reasons. Looking at the Fiscal deficit of our nation, there is an urgent
need to review the amount and nature of these corporate subsidy or
tax concessions provided to the giant companies. These tax breaks must
be project specific and should not be taken as a cost saving source for
businesses seeking sustained tax concessions. We cant totally neglect its
importance of it but we need to prioritize the sectors according to which
we should give them the subsidies. For example, the BPO service
providers and IT companies have tax liabilities of just 12% and 15%
respectively but their annual growth in revenue and profit is more than
25-35%. The effective tax rate is way less than the actual corporate
income tax of 32.19%. The union government recognizes the size and
the effects of such revenue forgone. However, concrete measures are
not taken in this regard.