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Tinkering with tax rates is not a good idea

By DM Deshpande

Now, the budget’s not so good provisions are coming to light. The FM has increased duties in respect of a number of goods, though, in her speech she maintained that they are just a few and are needed to ‘protect the home turf’. Actually, tariff barriers have been erected across sectors and in industries such as chemicals, newsprints, automobiles and electronics. At a time when Indian industry is broadly aligning with global competition, this sort of measure will only push them in to a hole of inefficiency.

A low uniform custom duty across the sectors is needed. This will help the small and medium enterprises and make our bigger companies globally competitive. It is rather incomprehensible that when there is no demand from the industry for such protectionist measures, why such a dose is being given. Such moves are retrograde steps and they undo the painstaking reforms undertaken earlier.

Last fiscal year, tax collections were a full one percent lower than the expected target of 7.9 per cent of the GDP. Not just the global experience, our own past shows that tax collections have been buoyant every time rates were cut. Instead of cutting rates, the government has hiked taxes in several key areas. Even the lowering of corporate tax to 25 per cent is not going to benefit several listed companies because of the ceiling of annual turnover of not more than Rs 400 crores.  

Super rich are levied additional surcharge if their annual income exceed Rs two core and Rs five crores respectively and their effective tax rate now is 42.7 per cent from 35.8 per cent. This is a steep hike and cannot be justified on the ground that there are other nations that soak the rich in more taxes. Why should a globally mobile professional put up with appalling infrastructure that is on offer in Indian cities? Acute water shortage in Chennai, terrible air quality in Delhi and commuting  woes everywhere. And it is not that they do not have a choice; they can always go to a low tariff haven such as Singapore.

Not just the individuals, institutions too are not spared. Several foreign funds investing in India are classified as non-corporate trusts or associations, they are also in this tax net unless, of course, they lobby and find a way to get out of it. Companies buying back shares are levied a stiff 20 per cent tax. That is unfair because it is with retrospective effect. The probable reason for the levy is that the government wants that corporates invest this sum instead of paying back to shareholders. If it is so, it is not the best way to induce the companies to invest. Investment decisions are taken after analyzing several commercial factors such as markets, trends, shift in demand, products and even the state of the economy.

 Why is the government hiking cess and surcharges only? Is it because the states will not get a share and the entire proceeds remain with the central kitty? Such questions will be asked by several states in course of time. Further, why has the government hiked the receipts from financial institutions in the form of dividends by a steep 43 per cent? It expects to collect a staggering Rs 1 trillion from this source. Banks are undercapitalized for a long time. They will not be able to give much to the government in the form of dividends.  So, clearly the government appears to be eying the RBI to part with ‘excess capital’.

The public spat between the Government and the RBI has already claimed a few ‘casualties.’ There is a greater responsibility on the part of the government not to arm twist in dealing with the issue.

On the whole, decision to borrow from abroad by issuing sovereign bonds is sensible for the benefit of longer term loans with lower coupon rates. But raising custom duties on a number of goods does not gel with the idea of globalization. These two will work at cross purposes.         

*The writer is in the field of higher education- teaching, research and administration for nearly four decades. Presently he is the Vice Chancellor of ISBM University, Chattisgarh

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