Budget 2016: Jaitley Must Focus on Exacting More Corporate Taxes

Should the corporate tax rate be increased in India on the lines of other G20 countries, asks Mohan Guruswamy.

India has a long way to go in terms of increasing its revenue collection from taxes. (Photo: iStock)

Stripped of all the verbiage, the main function of a government is to collect taxes. To do so effectively and successfully it must preserve order and stability and ensure conditions to keep the economy growing. The more it grows, the more revenues it collects and therefore how much it collects is the truest index of its success.

A nation’s power is directly related to the revenues it realises from its citizens. The US is powerful because it collects almost $17,464 per capita from its citizens. Those who predict the imminent rise of China and then India to the rarefied heights of being a global power do not seem to realise that China collects only $1,600 per capita and India only $284 per capita.

(Infographic: Liju Joseph/The Quint)

Why Stream of Taxes is Important

There is no doubt that the GDPs of China and India will close in on that of the US within the next three or four decades. But we will still be nowhere near the US when it comes to that raw index of true power, which is how much money does the State have to spend? How much money a government has determines how much it can transform our lives and influence the world too.

A State has four main streams of collecting taxes. These are corporate and personal income taxes, sales taxes and levies, and customs and excise duties. Every year, as the budget proposals for the next year are written there is a general clamour from trade and industry bodies like the CII, FICCI and Assocham, pleading for a reduction of the rates of all these. While they package their pleas with what purports to be sound economic logic, the real logic is just that the better off just want more and give less.

Of course, taxes ought to be reasonable and balanced to give the State more money to spend without imposing a backbreaking burden on its private and corporate citizens. To find this reasonable, a fine balance is what good government is all about. Too high an incidence of taxation will not only encourage cheating on taxes but also will make industry and commerce unprofitable and disincentivise individuals.

Taxing Times Are Here Again

• India is nowhere near the US in terms of the volume of taxes it collects. China collects nearly seven times more than India.
  
• Government could have been richer by Rs 5.8 lakh crore if the I-T department had not dragged its feet over recovering the amount in time.
  
• After interest on outstanding central government debts, the biggest item on the budget is subsidies.
  
• With PSU, power sector, railways and road transport corporation losses, and state government subsidies, we are looking at about 20 per cent of the GDP.
  
• Compared to China, India’s government revenues have been growing relatively slower at 12 per cent.
  

(Infographic: Liju Joseph/The Quint)

Are Tax Rates Justified?

There was a time in India when personal income tax was as high as 98 per cent for the highest slab. The consequence was that there were few honest people at the higher slabs. Cheating the State became – and still is – a common practice. With the rates now much more sensible, this has not abated.

But are taxes still too high in India? Let’s take corporate taxes. The US and Japan top the list with 40 per cent and 40.69 per cent, respectively. Germany collects 38.36 per cent, Italy 37.25 per cent and Canada 36.10 per cent.

Among the G-20 countries only China imposes a smaller percentage than India. China’s rate is a flat 33 per cent and India’s is 33.99 per cent. China’s rate has been steady for the past five years while that of India has declined by almost 2 per cent. As a matter of fact, only India, among the G-20, has been steadily reducing the incidence of corporate taxation. Despite this, uncollected taxes are on the rise.

(Photo: iStock/ Altered by The Quint)

The government could have been richer by a gargantuan Rs 5.8 lakh crore if the I-T department had not been dragging its feet over recovering the amount in time or holding up files in appeal cases at the commissioner of Income Tax level. Another Rs 2.1 lakh crore is stuck in litigation cases at the Income Tax Appellate Tribunal, high courts and the Supreme Court. The total figure is now over Rs 8 lakh crore.

Burden of Subsidies

After interest on outstanding central government debts, the biggest item on the budget is subsidies. The Centre’s total subsidy bill last year was Rs 3.6 lakh crore. The biggest item in this are those related to food procurement and PDS, accounting for about Rs 1.2 lakh crore. Of this, the bulk is towards procurement with ever increasing support prices which is almost entirely concentrated in Punjab, Haryana and the delta region of AP.

(Photo: iStock/ Altered by The Quint)

To that extent, it is subsidy meant only for a few. Fertiliser subsidy accounts for Rs 65,000 crore and once again mostly used up in areas with irrigation. Petroleum subsidies crossed Rs 1.3 lakh crore in 2014 but have somewhat stabilised now due to the sharp fall in oil prices.

(Photo: iStock/ Altered by The Quint)

Slow Growth in Revenues

To this huge subsidy bill we can add PSU losses, state government subsidies, power sector losses and railways and road transport corporation losses and we are looking at a sum equal to about 20 per cent of GDP. No nation can live like this for very long.

But what must cause finance ministry even more concern is that China’s government revenues have been growing by almost 17 per cent each year since 1998. And India’s revenues have been growing relatively slowly at 12 per cent in comparison. It’s true that their GDP has been growing faster than ours. But it is also true that they collect more taxes and give far lesser write-offs.

(The author is chairman and founder, Centre for Policy Alternatives)