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Several months ago, this newspaper had carried a long article on the issue of food labelling in India. Indian snack food manufacturers had dragged their feet for nearly five years on affixing indicators on their products to let consumers see at a glance how healthful or not their products are.

Instead, they were using commercials to make misleading claims that their snacks were healthful. Covid complications and even fatality have been strongly associated with obesity. Industry associations, far from persuading their members to fall in line with these important safety regulations, have been either silent or advancing their case. Why is this relevant now?

When companies and industry bodies contribute to covid relief, rescue and rehabilitation efforts and urge governments to spend monies liberally, they should remember that they have to do both what is required of them and what is within their power to do. This column focuses on the latter.

While the International Monetary Fund’s World Economic Outlook is widely read, its Fiscal Monitor released at the same time is not given much attention. Chapter 2 of its April Fiscal Monitor has a chart (figure 2.5) that shows how much of the school year children lost in 2020. The loss is worse for children of low-income families whose parents are not educated themselves. Indian states have mandated school closures in 2021 too. Another chart (figure 2.1) in the same chapter shows the global change in income inequality over the past three decades. China and India lead its rankings in terms of worsening inequality. The chapter usefully summarizes various revenue-generating options for governments (figure 2.15). An excess-profit tax is one of the options.

In the past, this column has argued for reasonable taxes on the Indian business sector. The World Bank’s Ease of Doing Business rankings on paying taxes pegs India’s rank low. In other words, it is not easy to be a taxpayer in India and it is not just about tax rates. India’s effective tax rate is pegged at 49% in the 2020 report. This is before the top tax rate was reduced. Union budgets of the last few years have published an Annexure 7 as part of the receipts budget. In the three years from 2016-17 to 2018-19, India’s effective corporate income tax rates were 26.9%, 29.5% and 27.8%, respectively. We don’t know the number yet for 2019-20. But, India collected only around 5.6 trillion in corporate income tax during the year. The figure is provisional. Of course, India’s corporate profits declined in 2019-20. According to some estimates, profits of only profit-making companies were just under 9.1 trillion in 2019-20 compared to a little short of 10.3 trillion the year before. For the year ended March 2021, this number is estimated to be almost 10.9 trillion.

In September 2019, the top corporate marginal income tax rate was dropped to 22%. The effective tax rate would have likely slumped by 500 basis points in 2019-20. The expectation was that corporations would respond with enhanced capital formation and job creation. Covid intervened, however, and demand has slumped. So, indeed, has capacity utilization. Hence, non- financial capital formation is unlikely to pick up now. Therefore, the government could consider a one-time additional tax to be collected in 2021-22 on the profits of 2020-21, just as it brought in an ordinance to lower taxes in September 2019. Indeed, if capital formation does not pick up and if corporate tax revenue growth is too low relative to the growth in profits in the coming years, it may well become necessary to revisit the country’s top marginal corporate tax rate.

There is another alternative. In 2020-21, the market capitalization of companies listed on the National Stock Exchange in India went up by almost $1.3 trillion to a shade under $2.8 trillion, according to the World Federation of Exchanges. That is an 85% return. Even if a 1% tax is imposed on these financial profits, it would fetch the government around 90,000 crore.

The third alternative is to consider raising the short-term transaction tax on stock market transactions. There is a risk that these measures might temporarily lead to a sell-off in Indian stocks. But, that could be healthy over the long-term both for the market and investors, given that Indian stocks are valued too richly relative to their earning prospects.

Indonesia is considering levying a new layer of tax rates to tax the incomes of the rich, along with a tax on carbon emissions, etc. In India’ case, the top marginal tax rate on individual income is already quite high. In fact, the gap between the top marginal income tax rates on corporate and personal incomes in India is one of the widest in the world.

The government has the big task of reviving India’s economic growth, upgrading the health sector capabilities and ensuring that young Indians do not lose out on education and skills. Those who can share the responsibility must come forward to do so. The corporate sector and investors in Indian stock markets appear better placed than all others to play their part in rebuilding of country’s economy and confidence.

V. Anantha Nageswaran is a member of the Economic Advisory Council to the Prime Minister. These are the author’s personal views.

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