May 28, 2012

Tax exemptions: Feeding fat cats in the name of aam aadmi

Sometimes I feel that just like celebrities and politicians, who move around with a force of bodyguards, Corporate bigwigs have deployed an army of economists and economic writers who at any given opportunity spring up on their feet to defend all the wrongs that the rich and the powerful indulge in. Well, I am not talking about unlawful activities, but what happens when you point a finger at the perks and freebies that the rich industrialists are provided by the government? The economic writers scream and try to drown the facts.

It has happened a number of times with me. Every time I raise the issue of 'revenue foregone' that in reality is the total amount of tax exemptions that the rich industries/business have been showered with all these years,  the rebuttal is angry. Many a times, the TV anchor cuts me short, and shift the question to another panelist who will simply talk of something else. Other times, they express ignorance as if what I am saying is never heard of, and probably was figment of my imagination.

Only a few days back, when petrol prices was increased, I had on a TV show raised the question of feeding the big cats while taxing the poor and aam aadmi (common man). Qouting Noam Chomsky, I had said that governments all over the world, and India is no exception, follow the policy of "Tough Love": Tough for the aam aadmi, and love for the rich. At a time when the government provide tax exemptions to the tune of Rs 5.29 lakh crore to India Inc. I see no justification in making the poor pay for the rising petrol prices. Since 2004, if you add the 'revenue foregone' (provided in every Budget document), the total tax relief, including income tax for CEOs and senior executives, exceeds Rs 26 lakh crore !!

I am glad Arnab Goswami of Times Now had posed this question to economic writer Swaminathan S Anklesaria Aiyar. In his column in Times of India this Sunday (May 27, 2012), Swaminathan Aiyar has provided his answer. Tax exemptions: it's not just the fact cats who benefit (available at http://bit.ly/Kc04pQ), Aiyar says: "The notion that tax exemptions are aimed only at fat cats is false." He goes on to quote a study by Rajiv Kumar and SK Ghosh of FICCI (Federation of Indian Chambers of Commerce and Industry), which incidentally is a lobby organisation of the fat cats.

Arguing that tax cuts will stimulate demand, Aiyar says: "This is why taxes were cut in 2008-09 -- to generate a big stimulus for an economy hit by the Great Recession. At the time, the left Supported a strong stimulus to help the aam aadmi. Yet today, some tax cuts are being called 'revenue foregone' and decried as corporate loot." 

I don't understand. All these tax benefits, with the basic idea of spurring growth, were expected to provide stimulus to the industry. In 2012, we find that the manufacturing sector is down to minus 3.5 per cent, industrial growth is stagnating, and exports are decreasing. Where has this stimulus gone? Kumar and Ghosh, says the article, calculate that another Rs 174,418 crore of the 'revenue foregone' comprises import duty concessions for inputs into export production. Exempting such inputs in standard global practice. It would be stupid to tax and maim exports. Well, if this is true, the exports should have increased. I am sure you will agree. But then why is it that exports in 2011-12 have halved compared to 2010-11?

Look at the other main argument. Rs 198,291 crore comprises tax breaks/duty for mass consumption goods like medicine, toothpowder, candles and kerosene. These are aimed directly at the aam aadmi. Revenue foregone also includes massive tax breaks for crude and petroleum products (an estimated Rs 58,190 crore) in 2012-13). So, in a sense, Arnab's wish has come true: the middle class is getting a big oil tax break ! Now this is interesting. Medicine prices in India have been steadily rising, and that is why the government is trying to bring price control on certain medicines whose consumption is higher.  As far as tooth powder and candles, I don't know if there was ever a problem with its prices. Coming to massive tax breaks for crude and petroleum products, I am not sure when was this FICCI study done (probably before the recent price hike). In any case, the government has been subsidising diesel, LPG and Kerosene and the oil companies are not left to bear the loss. So where is the benefit to the aam aadmi? 

If you are wondering why the fat cats are becoming obese, it is because of the tax exemptions that are being routinely provided. Let me make it very clear that the economic stimulus package, which included tax concessions to the tune of Rs 3 lakh crore plus, began after 2009-10, and still continues despite everyone agreeing that these should have been withdrawn in 2011.

And now let us understand as to what would be the gain for the country if these tax concessions to the fat cats were withdrawn:

1. Withdrawing tax exemptions under the category of 'revenue foregone' will wipe out the fiscal deficit that everyone croons about. The national economy will be back on its feet. Rs 5.29 lakh crore almost equals the fiscal deficit of 5.2 per cent or so.

2. With the government treasury fully packed, it will be easy to provide petrol, diesel, LPG and kerosene to the aam aadmi at affordable prices. And once the oil prices remain within reach, there will be no rise in bus and train fares, which hurt the lower strata of the society.

3. Inflation will also get moderated. Fuel prices hike plays a significant role in raising prices (besides providing the right kind of market sentiment).

4. It will make the industry/big business more cost effective. With no tax exemptions available (basically to strengthen their bottom line), they will be forced to tighten belt, and compete efficiently. #      

7 comments:

Bhavana said...

I dont want to just read your analysis-- I want to do more than that...

Anonymous said...

What about these companies moving to other countries where they provide tax break. Don't you think that it will be more like killing the golden goose.

Ravi

Devinder Sharma said...

Ravi,

It is natural that companies move to areas where they get cheaper labour and more resources to exploit. Between Jan-April, Indian companies have invested $ 8 billion in foreign countries, mainly Africa. This is the reason for the flight of the capital. They took the benefits here, and invested abroad.

All MNCs which invested in India also followed the same prescription. We didn't crib when they were came to India. Nor did US/EU complain.

Devinder Sharma said...

Dear Bhaavna,

One does feel outraged when one gets to know the ground realities. I can therefore understand your frustration and anger. You can write to me and we can see how to channelise energies of younger people. Welcome !

Thanks

Devinder Sharma said...
This comment has been removed by the author.
Pakka said...

Devindar..... I like reading your blog as it deals with real issues. I do have a serious problem with your analysis. In this post you talk about tax breaks. The real issue is the idea of taxing, why should govt. of India tax at all? Why should it be spending so much money? In-fact spending is a tax, when govt. spends it is tax. Let’s have fewer taxes for all Indians which mean less spending at the central and state level. When govt spends less or rather taxes less the citizens have more money and they can use it to make lives better for themselves or help the less unfortunate among us. By the way we all know govt. spending is the most inefficient spending and it almost always leads to corruption.

Let each city/town/village collect its tax and let’s have a federal system which was the original idea of India. As long as we tolerate taxing we will end up discussing who gets more or less taxes. When you have tax laws it is very easy for the rich & the powerful to turn their advantage, a small business man cannot afford to hire a good auditor, tax consultant or lawyer a big business can. So if you have ever worked for a corporate, like I do, you would understand this, they love tax laws so that they can turn it to their advantage. Politicians love tax laws because they can tax and spend or hand out to their buddies. The debate we have to have is about the govts. authority to tax not who gets how much tax.

If you tax any business big or small it has the most severe effect on the small guy. If you tax unilever the poor guys soap and toothpaste gets expensive. And of course there is the most sinister of all taxes, inflation, making the poor poorer. My heart bleeds when I see the poverty in my country and it can only be solved when all of us Indians become middle class and prosperous. If we want to be prosperous we need maximum freedom for the individual, property rights for all has to be sacrosanct, savings, sound currency, capital accumulation and investment and of-course less very less regulation.

I hope to see real causes discussed for real problems.

Dara Dhillon said...

Dear Davinder,

I would rather have total tax regime abolished and starve the beast but political reality is very different. Ruling class always rewards its controlling class or group. The same group, through their financial and political clout controls the universities (and their curriculum) where people get advanced degrees in Economics. These are the economists, who then publish articles in the main stream media(abusing their academic authority), such as tax exemption for a certain section to stimulate the general economy.

Dara Dhillon