Panagariya urges corporates to stop seeking tax sops from the Centre

Says industry’s obsessive focus on tax structures is not ‘progressive’.

Niti Aayog Vice Chairman Arvind Panagariya on Monday castigated Indian industry’s inability to ‘think big’ and urged corporates to stop seeking tax sops from the government on every possible occasion with an eye on short-term gains.

“In my one year in the government, whenever I have interacted with industry representatives, they always say can you please raise the tax on this by 5 per cent or lower it by 2 per cent, it will boost our profits by 5 per cent in the next quarters,” Mr. Panagariya said.

“…So every time there’s a budget consultation, all the businesses, CII, FICCI, etcetera will make their pleas — cut tax by 5 per cent on this, or if it’s a product that is facing import competition, they would say raise my tariff by 10 per cent and then, I would become profitable. But that’s not really going to transform the economy,” he pointed out.

Industry needs a different mindset for the country to undergo transformational change, said the free-market trade economist from Columbia University who was brought into the government last December to steer the new think-tank that replaced the Planning Commission.

“Tweaking around the existing equilibrium to boost one sector’s output by 5 per cent is just not going to do it. You really have to think much bigger, you have to think like China,” Mr. Panagariya said at a summit on small and medium enterprises hosted by the Confederation of Indian Industry. “The world’s electronics goods market is 2 to 3 trillion dollars. China alone exports about $700-800 billion, ten times our domestic market. That is the (global) market we are aiming to capture,” he said, stressing that industry’s obsessive focus on tax structures wasn’t ‘progressive.’

The Niti Aayog Vice Chairman’s comments assume significance as several industry segments are now lobbying hard for changes and relaxations on both the direct and indirect taxes front.

Mr. Panagariya was present in Prime Minister Narendra Modi’s meeting with industry captains in early September, where some of them talked about the inequitable tax treatment their sector faced and the need to impose anti-dumping duties on some products facing an influx of cheaper imports.

In November, the finance ministry proposed a roadmap for phasing out tax exemptions enjoyed by corporate tax payers, as part of its plan to bring down the corporate tax rate from around 30 per cent to 25 per cent in four years.

The plan includes doing away with all ‘profit-linked, investment-linked and area-based’ tax deductions. The finance ministry has sought comments from the public and industry on this roadmap by December 31.

With the meltdown in global commodity prices over the past couple of years accompanied with a sharp spurt in cheaper imports of metals like copper, aluminium and steel has forced many Indian corporates, including Hindalco and Vedanta, to seek safeguards such as higher import tariffs and the imposition of anti-dumping duties.

Separately, following the Chief Economic Advisor Arvind Subramanian’s report on the possible Goods and Services Tax (GST) rates, industry players are likely to make efforts to stay out of the ‘sin goods’ bucket that could be taxed at 40 per cent (such as soft drinks, cigarette and pan masala) or argue to be placed in the bucket of goods eligible for the ‘concessional tax rate’ of 12 per cent.

Stocks of cigarette makers such as ITC and Godfrey Philips fell over 5 per cent on Monday in the first trading session since the release of the CEA’s report on GST.

Mr. Panagariya earlier said that late Prime Minister Indira Gandhi’s decision to reserve a large number of products for small scale industries in India, prevented the country from tapping the global export opportunities that China captured in the 1980s and the 1990s.

“We lost out to China as we missed out on efficiencies of scale. We must not reward small enterprises for staying small, but incentivise firms to become larger,” he said, citing empirical evidence that small and medium firms are more efficient in sectors where there are large, successful players. Highlighting the example of textile apparel exports, he said that India exports just $17 billion worth of apparel, while China exports $180 billion. “Bangladesh and even Vietnam have now surpassed us… That’s because 94 per cent of our apparel workers are in firms with 50 workers or less, and less than six firms have over 2,000 workers,” the Niti Aayog Vice Chairman said. In comparison, 65 per cent of China’s apparel exports came from large enterprises, he explained.