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| Letters: India Inc on the mat |
| Business Standard / New Delhi Aug 24, 2009, 00:07 IST |
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What kind of direct tax code is this? Touted as a big reform measure, it was supposed to save individual taxpayers as well as companies from changes every year. The way the government sold the code, it was going to lower the tax burden. This has proved to be a sham. Hats off to Abhineet Kumar and B G Shirsat (‘New MAT provisions to cost large firms over Rs 11,500 crore’, August 22) for exposing the lie. The new tax code, far from reducing the tax burden for Indian corporations will nearly double it. This, in turn, will affect the companies’ ability to invest more money.
The ostensible reason given by the government for this kind of taxation is that companies lie about their accounts, so this is the only way to deal with it. Surely this is a big indictment for the government’s faith in its own ability to find out if there is balance sheet fraud and to deal with it. Having admitted that it has no ability to read a company’s balance sheet, the government has come up with a mathematical formula to calculate the taxes. Let’s assume a company’s assets are Rs 100 crore. Given that every rational business must earn at least 8-10 per cent return on capital, this means it earns Rs 8-10 crore a year and so, based on the effective tax rate of around 25 per cent, the company should pay the government Rs 2-2.5 crore as taxes. So, if it doesn’t show profits of Rs 8-10 crore, the tax code says, let’s just ask it to pay 2 per cent of its asset value as taxes.
This is an absurd argument to say the least and indicates the government has no idea of how businesses run or of business cycles since, in a downturn, a company making losses or lower profits will end up borrowing funds in order to pay off the government. The code also has large tax implications for individuals who invest in the stock markets since the STT paid currently reduces the effective tax rate on capital market transactions to a very small amount. Now that the STT has been abolished, the capital gains will be taxed at the full salary rate. The only gainers of this will be those running portfolio management schemes since the code allows those making capital gains to invest in special tax-saving schemes of portfolio managers.
Sudhir Gupta, Gurgaon
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