For the big companies, the next fiscal could well signal Code Blue—an emergency. Finance Minister P. Chidambaram is planning to do way with some of the tax shelters in his proposed Income Tax Code, according to government officials. The new piece of legislation is expected to be finalised by the end of the month, and debated in Parliament by the yearend, before it becomes law.
An act of socialism, or an attempt to introduce equity in taxation? The latter, it appears, given the tax data that his ministry has amassed over the year-and-a-half. Here are some of the findings: First, companies end up paying tax at an average rate of 19.26 per cent against the statutory rate of 33.66 per cent, owing to the various exemptions.
Secondly, companies with a pre-tax profit of less than Rs 1 crore collectively pay more taxes than those with a profit of Rs 500 crore per annum and above. Finally, corporate tax exemptions cost the exchequer dear, as the latter foregoes as much as 10 per cent of the total tax collection of Rs 5,48,122 crore. And this is no play on statistics: the data pertains to 3,00,000 companies, 90 per cent of companies in the country that are registered with the tax authorities.
It is not just the beneficiaries who object to the proposed legislation. Says Aseem Chawla, Partner, Amarchand Malgaldas: “Any attempt to introduce a general avoidance rule that renders the existing exemptions invalid is fraught with peril. It will lead to a flurry of litigations and serve little purpose. The larger objective of the new code should be to widen the tax base.”
However, the Finance Minister has been training his gun at ‘subsidies’, as he chooses to describe the tax shelters, for a while now. In this year’s budget, he quietly began this exercise (See What He Took Away…). Collecting taxes efficiently is as important as unburdening the exchequer of the ‘subsidies’. And here, the Finance Minister has reason for concern. The tax records show an abnormally low growth in Excise tax collection of around 6 per cent in the April-July 2007 period (See The Tax Pie), well below the 10.8 per cent target set for the year. The shortfall was despite the strong growth in manufacturing, which has grown at over 9 per cent per annum.
Tax officials point a finger at the Budget decision to raise the tax exemption for SSI units from Rs 1 crore to Rs 1.5 crore (turnover). Hence, new businesses don’t pay excise duty on their produce for a longer period of time. A larger issue relates to evasion of taxes, which the government is unable to plug successfully. Here’s why: every time a product leaves a factory, excise duty is paid. Hence, in a manufacturing process involving many such products, duty payments will cascade.
To avoid this, the government allows for tax credit, which can be accumulated and set off at the final stage. However, in the absence of computers tracking individual consignments, and their tax credit, the system is prone to abuse. Says a ministry official: “We have few means to find out the veracity of the tax credit.”
For the government, losing this precious revenue can dent its credibility— it has locked into a fiscal responsibility regime, which demands that the fiscal deficit reduces by 0.3 percentage points and the revenue deficit by 0.5 percentage point every year.
Plugging leaks in the government’s Excise kitty is only a matter of time. However, to plug ‘subsidies’ is not going to be easy. With general elections less than two years away, political resistance to such tax reforms could well be intense. Especially, given that several tax shelters and exemptions given over the last four decades are oftentimes instruments of corruption. Scrubbing out the stains will not be easy.