31st March

FICCI suggests lower taxes

The article refers to one of the FICCI-PwC joint study that revealed that corporates in India ending up paying 35% of their profits as taxes to the government contrary to the government claim of 20.6%.

The reason to such difference is the inclusion of business taxes in the study – taxes other then the corporate ones like stamp duty and DDT that corporates have to account in their P&L statements. These taxes add another 40% to make the total taxes paid to 36% in a sample survey of 41 corporates. While government has measured corporates taxes as simply a percentage of pre-tax profits to get the figure of 20.6% for some 3-lakh corporates which include those with lesser exemptions and high effective tax rates. The complex tax structure and high administrative costs is a reason why India today stands 169 in World Bank’s 181-country “Doing Business” survey ranking with respect to ‘paying taxes’ parameter. Govt’s argument could be that exemptions help corporates in easier corporate tax planning. But complex system and high taxation is the reason perhaps why small and medium companies tend to work in an informal market even at the cost of foregoing the benefits of formal economy like cheaper credit. 

Thus, there is clearly a requirement of cleaner taxation regime for more informed debate over the corporate taxation.

Working capital diversion

The article talks about the unnecessary dragging of CBI and CVC done by some of the public sector banks on account of the doubts over the improper use of money they have lend to corporates as working capital.

These banks have blacklisted the companies whose promoters were found to be using the funds on assets for personal use rather then for the reason they were borrowed i.e. Working Capital and are planning to submit the report to CBI and Central Vigilance Commission (CVC). The move has been prompted the need of banks to comply with provisioning requirements under Basel-II norms. But it should be noted that CBI is generally involved in criminal cases rather then economic frauds except for some exceptional cases like Satyam. CVC is also believed to be involved as a precautionary measure to avoid a probe at a later stage. While it is not every time possible to keep the track of the money lend by banks to borrowers, it is possible to put some restrictions for borrowings like external commercial borrowings but not for borrowings like working capital. Instead bank should ensure timely payment of principal plus interest and constantly monitor the credit worthiness of the companies that default. 

Oversight of the use of borrowings by the corporates should be better left to market regulators like SEBI, RBI and Ministry of Corporate Affairs.