You are evidently better off making medicines than administering them as a doctor in India, at least as far as the tax system goes.
Information provided in the Budget papers shows that some activities such as software, outsourcing, diamond cutting and pharmaceutical manufacturing have very low rates of taxation, while other areas such as beauty parlours, television channels, banks, advertising agencies and legal professionals have high rates of taxation.
Illustration: Jayachandran / Mint
Notice that the group that pays less tax for every unit of profits produces goods and services that are easily traded across international borders, while the group that pays more tax for every unit of profits does not produce stuff that can easily be traded across borders. In short, the direct tax system in India seems to discriminate against non-tradables and in favour of tradables.
Is this good policy? This question defies easy answers. It is good policy, if one goes by the development record of many Asian countries. These countries have traditionally used subsidies and undervalued exchange rates to promote the role of tradables in their economies; that is the underlying story in their export-driven success.
But this sort of tax-based discrimination makes less sense when you notice that the Indian economic model has been less dependent on labour-intensive exports and relatively more dependent on services such as beauty parlours and banks. It is perhaps a tribute—no pun intended— to the lobbying power of exporters of tradable goods and services that they get away with relatively light taxation.
The new direct tax code that is likely to be introduced in 2011 will clean the tax system of exemptions and ensure that tax rates on profits from tradables and non-tradables are the same. That leaves the government with two other policy options if it plans to follow the East Asian model: direct subsidies or an undervalued exchange rate.
Mind you, these are not theoretical debates. The United Progressive Alliance government has within it elements that believe India should have an industrial policy on the lines of those in Japan or South Korea, where the state chooses industries where national companies can be globally competitive and provides support to national champions.
That is what makes the entire debate on equalizing tax rates of companies making tradables and non-tradables especially important.
Does India discriminate against non-tradables? Tell us at email@example.com