Dr Ashwani Mahajan
Finance Minister Nirmala Sitharaman made a big announcement that the corporate tax rate on domestic companies will be reduced to 22 percent from the present 30 percent. This rate would be applicable from the current financial year itself. Not only this, the rate of corporate tax on new manufacturing companies would be 15 percent only. Though, with changes, India would be comparable with any low tax regime country, this decision would cost nearly rupees 1,45,000 crores to the exchequer.
According to the revised estimates for the year 2018-19 as compared to the budget estimates of the year 2018-19, there was a shortfall in Central Government’s revenue by Rs 1 lakh 70 thousand crore. This reduction is equivalent to 11 percent of the budget estimates. When the revenue is not realised as per the budget estimates, it causes pressure on the Government’s expenditure, on the one hand, it inflates fiscal deficit, on the other. In other words we can say that revenue shortfall causes pressure on fiscal management. The Government has very few options left in this kind of scenario, and the general public has to bear the brunt of the same, because the Government has to cut expenditure on social sectors like education, health, drinking water, child and women development. Other victims of revenue shortfall is Infrastructure development.
In such a situation, Government’s desperation is understandable. In the budget, hurriedly a proposal was made to raise money through issue of sovereign foreign borrowing in external currency. Significantly, after independence, Governments had never decided to take sovereign debt in foreign currency. Sovereign debt in foreign currency has its own disadvantages. Countries, who had borrowed through foreign currency denominated bonds, had to suffer and they were subjected to conditionalities imposed by lenders, against sovereignty. There are many countries like Argentina, Ireland, Turkey which have suffered these tragedies. Most of the economists opposed this proposal, and warned against this policy, saying that it would be disastrous. The Government seems to have put this proposal on hold, at least for now.
Another way to raise funds is to transfer the excess reserves held by them to the treasury from the Reserve Bank. In this regard, the Government has succeeded in getting Rs 1.76 lakh crore immediately based on the recommendations of Bimal Jalan Committee. But experts believe that there is a need to increase Government spending to avoid the slowdown in demand. However, at the same time, there is a demand from some quarters to give tax concessions and other stimulus to the industry especially the ones which are most affected by this slowdown. However, we need to understand that there is no matching revenue for the same and transfer from the Reserve Bank of rupees 1.72 lakh crores is not sufficient to meet demands of the industry.
Why is government’s revenue not increasing?
Most of the shortfall in revenue (rupees one lakh 70 thousand crores in fiscal year 2018-19), has been due to lower GST receipts and shortfall in corporate tax.
It is believed that GST, ie Goods and Service Tax receipts are less than expected because of the huge amount of tax evasion. This is also reported by the CAG. According to a CAG report, the number of GST returns has actually come down. Tax credit is being taken on the basis of fake invoices and 7368 such cases were detected in the year 2018-19 involving a sum of Rs 38 thousand crore. Tax evasion was more than the cases actually detected. While the economy is already slowing down due to declining demand for automobiles, tax evasion and consequent reduction in Government revenue are adding to the woes of the economy. Although GSTN is working efficiently, it may take some more time to GSTN become flawless. In the last financial year, there has been a major concern over GST collection falling short of monthly target of rupees one lakh crore of total revenue.
According to the revised estimates of the budget for the year 2018-19, there should have been receipts of Rs 12 lakh crore, whereas actual receipts were only Rs 11.18 lakh crore, i.e. a shortfall of Rs 82 thousand crore.
Further, it’s notable that the receipts of corporate tax have also been much less than projected. The reason being stated is that the profits of small scale industries have decreased. It’s unfortunate that everybody is silent about the shortfall in corporate tax collections.
Why the goals of corporate tax have not been realised?
In the past years, corporate tax receipts have been booming, thanks to the encouragement given to corporates post new economic policy. It is not that the corporate business has decreased. The business of all the big corporate has been continuously growing rapidly. It’s surprising that despite that corporate tax is falling short of target. The reason for this is that a large number of ’emerging corporates’ are not paying tax. These are tech companies, e-commerce companies or giant foreign software companies. It is well known that the retail business of the country is constantly going into the hands of big foreign e-commerce companies. Similarly, very large aggregators have emerged in the field of taxi services, travel services etc.
Imperative to tax E-commerce and tech companies
There are many tech companies like Google etc. which did not pay any tax earlier. Some time back an effort was started to fetch tax from these companies. Government has been making effort that these tech companies like Facebook, Google etc, are forced to locate data in India. This may not only help in preserving important data of the citizens, it may pave way for fetching taxes from these digital firms. Till now, these companies keep all their data in foreign destinations, and report all their business from some foreign country, even if they are getting all their income from business within India. A significant portion of their revenue is the revenue generated by advertisements.
The Government of India in its 2016-17 budget decided to levy an equalisation levy of 6 percent on the B2B (business to business) sales of foreign tech companies, which are not considered as resident of India. But this equalization levy has a limitation that it is imposed on the B2B (business to business) sales only and not B2C (business to consumer) sales. Only businesses who receive services from these companies for a payment will have to withhold 6 percent amount as tax. This type of tax is being named ‘Google tax’.
But this Google tax effort is incomplete. This attempt to tax tech companies is half-hearted. In fact, these companies provide a huge amount of products and services to consumers. All types of equipment and software are sold to consumers and no tax is paid on that income.
On the other hand, e-commerce companies are incurring huge losses, due to their financial muscles, however, they do not pay tax as per Indian income tax provisions. In fact these companies are increasingly controlling the market and capturing data, take undue advantage of their financial power. Their valuation has been continuously rising, despite the fact that their accumulative losses are running into thousands of crores of rupees. It is worth noting that in April last year, a home grown e Commerce company was sold with a total valuation of nearly $20 billion. That means, the promoters are making windfall profits, but these companies are avoiding giving taxes. Experts are constantly suggesting that such companies could be taxed with a minimum alternate tax (MAT) or presumptive tax based on their sales. We have to understand that income has been increasing in these business for a long time, however, the state exchequer is not benefiting from the same. Such concern is being expressed not only in India but in the whole world. Efforts have already started in OECD countries and France has made an Initiative in this regard. India will also have to think about the same. Then only the shortfall in government revenue could be compensated.
(The author is Associate Professor, PGDAV College, University of Delhi)
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