Budget 2015: Chidu is wrong to claim corporates are main gainers

The more-or-less glum faces in India Inc even after the finance minister announced a four-stage cut in corporate taxes from 30 percent to 25 percent over four years tells its own story. It also gives the lie to former Finance Minister P Chidambaram’s claims that the NDA budget is pro-corporate and anti-poor.

Chidambaram wrote in The Economic Times: “The budget speech has shown great concern for the corporates and income taxpayers (3.5 crore)….Few countries have corporate tax rates lower than 30 percent. According to the finance minister, the effective rate is 23 percent. He has promised them a 1 percent reduction every year beginning 2016-17. That is a ‘relief’ of Rs 20,000 crore every year (Rs 80,000 crore in the fourth year) over four years"

This is, of course, a selective reading of Arun Jaitley’s speech. Chidambaram is largely on the wrong track, for what he has chosen not to hear is crucial. The cut in corporate taxes is supposed to be matched by reductions in direct tax rebates and exemptions to companies. In other words, what business gains in tax cuts, it will lose out partially or wholly by a loss of tax deductions permissible under the law.

Chidambaram has chosen to forget what Jaitley actually said: “This process of (tax) reduction has to be necessarily accompanied by rationalisation and removal of various kinds of tax exemptions and incentives for corporate taxpayers, which incidentally account for a large number of tax disputes.”

The 2015-16 budget tells us where the big deductions are in direct and indirect taxes. The major direct tax incentives given to companies relate to deductions on export profits ( revenue foregone in 2014-15: Rs 18,394 crore); accelerated depreciation (Rs 37,010 crore) and deductions on power companies’ profits (Rs 10,607 crore), among others. Taking all such deductions in direct taxes, the government loses Rs 98,407 crore, and then recovers a part of this through the minimum alternate tax (MAT). The net revenue foregone in direct corporate taxes is around Rs 62,399 crore.

Since the Rs 80,000 crore cut in corporate tax over four years is to be accompanied by reductions in deductions, the net corporate gain after eliminating all the deductions would be around Rs 17,600 crore max.

But, of course, the government won’t eliminate all these deductions. It will try and balance the revenue loss each year by reducing indirect tax concessions. This is where the corporate gains will be fully neutralised.

According to the budget documents, in 2014-15, revenue foregone in excise and customs reliefs to various sectors adds up to over Rs 4,86,452 crore. We don’t know which indirect taxes Jaitley will choose to raise to balance out his tax concessions, but one thing is sure: the net gain to companies will probably be zero or close to zero.

What they will gain is essentially simplicity in tax rates. This is what happens when you make taxes lower, but eliminate complicated deductions, which also lead to endless litigation on whether the deductions claimed are right. It also facilitates corruption.

Essentially what Chidambaram considers pro-corporate is actually anti-crony, and an effort to remove discretion in tax treatment which will eliminate the need for corruption.

Chidambaram also forgets one more thing. In 2015-16, the corporate tax rate has actually gone up marginally. And this is the Jaitley sleight-of-hand that he fails to recognise, since it goes against his thesis of the budget being pro-corporate.

Under the guise of taxing the super-rich (those with taxable incomes above Rs 1 crore) through the a 2 percent additional income-tax surcharge, what Jaitley has actually done is raise taxes for all companies earning more than Rs 1 crore of profits. He said: “The rich and wealthy must pay more tax than the less affluent ones. I have, therefore, decided to abolish the wealth tax and replace it with an additional surcharge of 2 percent on the super-rich with a taxable income of over Rs 1 crore. This will lead to tax simplification and enable the department to focus more on ensuring tax compliance and widening the tax base.”

This is how Jaitley managed to obtain Rs 9,000 crore of additional revenue when the total number of individual taxpayers with taxable incomes of over Rs 1 crore is barely more than 42,000. And this is a fact Chidambaram himself knows, for he was the one who touted this figure in his 2013-14 budget speech.

Chidambaram had said then: “There are 42,800 persons – let me repeat, only 42,800 persons – who admitted to a taxable income exceeding Rs 1 crore per year. I propose to impose a surcharge of 10 percent on persons whose taxable income exceeds Rs 1 crore per year. This will apply to individuals, HUFs, firms and entities with similar tax status."

What Jaitley did was merely pull another fast one on us a la Chidambaram. He used the idea of soaking the rich to pinch corporates a wee bit more.

The only way the budget is really pro-corporate is that it promises more measures to make doing business in India easier. Presumably, Chidambaram is not against that.