February 19, 2007

A few days back, I read a report in Business World about how little tax some companies in India pay, thanks to myriad exemptions and loopholes in the system to manipulate tax outgo.

I really fell from my chair on knowing that Reliance Industries pays much less tax (as a percentage of income) than what I pay. Yes, Reliance Industries paid just 8.41% of PBT as tax in 2005-06. To know how much tax some of the well known companies in India pay, see the graphics below (click and open in a new window for enlarged image).

Isn’t this shortchanging the Indian government? Not only is this resulting in a significant loss of revenues for the Indian exchequer but it is also giving unfair advantage to some companies who can manipulate the laws. But who is to blame? No doubt the culprit is the Indian government.

We Indians have a habit of holding on to things even after they have outlived their utility. Same is the case with tax exemptions in India, particularly in corporate tax segment. We introduce exemptions to encourage and develop a particular industry. When the objective has been met, we must remove the exemptions. But in our case we continue with the exemptions even when the objectives have been met and the particular industry has transformed itself into a behemoth. A case in point is IT industry which has outlived the utility of the exemptions provided to it. This is a fact that even Mr. Narayana Murthy of Infosys, the face of IT industry in India, admits to.

Another area of concern is the loopholes in tax laws and tax administration that can be manipulated with some creative structuring of the business and its investment. A complete set of finance professionals are out there with their services to ensure that all loopholes of the Indian tax system are fully milked to reduce the tax burden.

The problem is the complexity of law and administration. Complexity breeds inefficiency. The need of the hour is to simplify the tax laws and procedures in such a way that a common man can understand them. At the same time, transparency must be there. One way to start the simplification process is the do away with various exemptions. Exemptions are like plague.

Hope this issue is on the radar of our Finance Minister while preparing budget for 2007-08.

3 comments

  1. Manish // February 19, 2007 at 6:50 PM  

    Easier said than done...

  2. Sudhanshu // February 19, 2007 at 9:58 PM  

    Well, it's it just a matter of having policy writers smarter than the finance professionals.

    Come to think of it, is it too different from people finding vulnerabilities with Vista or Java.

  3. taxworry // May 4, 2007 at 10:25 PM  

    Plato's famous quote about taxation
    "When there is an income tax, the just man will pay more and the unjust less on the same amount of income."

    So, if the goverment frames scheme in such legal language that the law is strteched in favour of Some businessman , why wonder if they do not pay?
    taxquery AT www.taxworry.com