Dehradun’s tax fears are India’s as well

Dehradun’s tax fears are India’s as well
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First Published: Wed, Jul 01 2009. 11 21 PM IST

Tax titan: The B.S. Negi Bhawan in Dehradun, which houses the offices of ONGC. Thanks to ONGC, Dehradun captures the interest of journalists, economists and analysts tracking advance taxes paid by fir
Tax titan: The B.S. Negi Bhawan in Dehradun, which houses the offices of ONGC. Thanks to ONGC, Dehradun captures the interest of journalists, economists and analysts tracking advance taxes paid by fir
Updated: Wed, Jul 01 2009. 11 21 PM IST
Dehradun: There are several reasons why Dehradun has instant recall in many minds—capital of Uttarakhand, a popular tourist getaway from the hot Indo-Gangetic plains, a hill town 230km north-east of New Delhi, home to some of India’s most prestigious training and research institutes such as the Indian Military Academy, the Forest Research Institute and Survey of India.
The taxman has a different reason to remember Dehradun. It is home to Oil and Natural Gas Corp. Ltd (ONGC), India’s largest oil and gas explorer and the nation’s highest taxpayer at the end of 2008-09.
Thanks to ONGC, four times a year, Dehradun captures the interest of journalists, economists and analysts tracking advance taxes paid by firms. Firms pay advance taxes four times a fiscal based on their profit forecast for the year.
Tax titan: The B.S. Negi Bhawan in Dehradun, which houses the offices of ONGC. Thanks to ONGC, Dehradun captures the interest of journalists, economists and analysts tracking advance taxes paid by firms. Harikrishna Katragadda / Mint
On 15 June, ONGC paid Rs880 crore as the first instalment of advance tax for 2009-10, a 33.98% decrease from the corresponding period last year. The tax office is concerned, because ONGC accounts for around 90% of its annual target of Rs11,000 crore tax collection from Dehradun in the current fiscal.
“ONGC haathi hai aur baaki sab cheentiyan (ONGC is an elephant, others are ants). ONGC is the only case in which the board, ministry and the minister are interested. Earlier, Dehradun didn’t have a focused tax implementation policy and it was not a focus area for CBDT (Central Board of Direct Taxes),” said an income-tax official in Dehradun, who did not want to be named since he is not authorized to speak to the media.
ONGC’s importance to Dehradun’s income-tax office mirrors the story of direct taxes in the Union government’s income statement. Direct taxes, such as personal income tax, corporate tax and securities transaction tax, are the main pillar on which the government’s annual expenditure of about Rs9 trillion (in 2008-09) rests. A slowdown in direct tax collections, as in 2008-09, has the finance ministry bothered.
“Direct taxes still account for 30-35% of total collection by the government, out of which corporate tax would be a large chunk. Therefore, from the perspective of revenue, direct tax collection is an important source for the government,” said Amitabh Singh, partner with global tax advisory services firm Ernst and Young.
The income-tax office in Dehradun is located on Subhash Road, on which there is an old board stating: “Kardaata hai rashtra ka maan, kar se hota jan kalyan”, which, loosely translated, means the taxpayer is the pride of the nation and taxes promote common welfare.
The numbers are a stark indicator of the importance of direct taxes. Direct tax collections in a lacklustre year such as 2008-09 were Rs3.39 trillion, about 59% of the government’s revenue. The same year, direct taxes were equal to 38% of the government’s total expenditure. Such taxes are the government’s single largest source of revenue.
It’s not just the magnitude of direct taxes which makes them important. The manner in which they have grown in post-liberalization India make them critical.
Direct taxes were 2.33% of India’s 1991-92 gross domestic product (GDP) of Rs6.53 trillion. By 2007-08, they had increased to 6.58% of a Rs47.13 trillion GDP. They grew faster than GDP and emerged as the major source of revenue.
In Dehradun, income-tax officials are a worried lot. The economic slowdown has taken a toll on direct tax collections across India, but ONGC has to grapple with unique problems.
Concerned: Dehradun’s income-tax office, situated in a low-profile lane, gets a much higher profile on the national scene owing to ONGC. Harikrishna Katragadda / Mint
The firm’s tax payments decreased as its share of subsidizing the sale of fuel below cost swelled to Rs28,225 crore. The firm’s net profit fell 3% in the year ended March to Rs16,702 crore on a turnover of Rs63,949 crore.
Worried by the dip, the income-tax department has written a letter to ONGC asking the company for an explanation as it has a budget target of Rs11,386 crore for 2009-10.
“We are seeking their explanation. If you take ONGC out of our targets, nothing much remains. With a Rs500 crore or Rs600 crore reduction, what will happen to our collections?” asked an official in the Dehradun tax office.
ONGC felt it was too early to comment on the tax outlook for the year. “Only three months have gone by. Let’s see what happens,” said D.K. Saraf, director, finance, ONGC.
The Dehradun tax office’s anxiety mirrors a larger trend in India. The single most important source of government revenue, the stream which is expected to feed all of India’s social sector aspirations, fluctuates alarmingly.
“Direct tax collections are important because they help in funding infrastructure and other economic needs. The collection also helps the government in starting new ventures. And it becomes more important for public sector companies to generate surplus because they use public funds,” said Vikas Vasal, executive director with KPMG India Pvt. Ltd.
Taxes paid by companies is the largest part of direct taxes. Companies pay taxes primarily through four instalments of advance tax based on their forecast of profits and through tax deducted at source for work outsourced to others.
The year 2008-09 was a bad one for India as the fallout of the financial crisis in developed markets hurt the country and brought down economic growth to 6.7% after growth rates of 9% and more in the preceding three years.
But though the economy expanded when many other major economies shrank, advance taxes paid on company profits fell. The slowdown led to a contraction in advance tax payment by 1.4% to Rs1.32 trillion in 2008-09.
According to D.K. Joshi, principal economist and director of Crisil Ltd, advance tax payments are very sensitive to changes in the pattern of growth. For a start, the 6.7% growth is being driven largely by government spending, Joshi said. Moreover, during a downturn or an increase in growth, the sensitivity of direct tax to changes is huge as the bulk of the revenue is generated by a narrow base, he added.
Between 2004 and 2008, the high growth years, direct taxes grew between 1.79 times to 2.60 times of GDP. The pace of revenue mobilization from direct taxes was greater than the increase in economic activity.
In 2008-09, when tax rates dropped, direct taxes grew by 8.65% to Rs3.39 trillion, while nominal GDP grew by 14.2% to Rs49.33 trillion.
Dehradun’s problems with ONGC are a fair proxy of the government’s concerns about direct tax collections. Direct taxes are, as former finance minister P. Chidambaram said two years ago, the taxes of the future. A volatile future awaits India’s revenue generation if 2008-09 is any indication.
utpal.b@livemint.com
Teena Jain contributed to this story.
This is the fourth in a five-part series leading up to the budget.
Mint uses the metaphor of the PIN code, as it did in the coverage of the general election, to bring vignettes of the 2009 budget to readers.
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First Published: Wed, Jul 01 2009. 11 21 PM IST
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