A disaggregated study of all companies in India done by the Income Tax department has thrown up this data.
The reasons are obvious. Income tax exemptions are given mostly against investments made in capital or in some cases are given for setting up the units in say, backward areas.
This works against labour-intensive companies like security agencies, retailers, hotels or banks. They can show little capital investment to get any tax set-offs. Many of them like security agencies or electronics agencies would need to be located in urban areas to tap either clients or skilled labour and are therefore even more hamstrung.
Even as the government is trying to push job creation through various ministries it is obvious that tax set-offs are creating negative incentives. This years Budget provisions further push the same line.
The chart alongside is an illustrative list but demonstrates the huge tax differentials clearly. The data covers all companies that have filed tax returns till March 31, 2014 and published as statement of revenue foregone by the finance ministry as part of its Budget documents.
It shows that all the employment-heavy sectors pay higher rates of taxes than those which are capital intensive. The amount is not peanuts. In FY13 the total corporate tax exemption given by the government was Rs 68,720 crore. For FY14 the sum is projected even higher at Rs 76,116 crore or 11 per cent more. A lions share of that, data shows promoted capital spending and hurt employment generation.
Speaking about the phenomena, M Lakshminarayanan, Partner Deloitte Haskins & Sells said tax set-offs are measured against capital investments made. This creates a natural bias which is evident in the effective rates, he said.
The statutory tax rate for all companies in FY13 was 32.445 per cent. Since companies have the option to choose between a wide arrays of exemptions, none of them pay the full rate.
But here too, as the chart shows, companies that deploy more labour than capital are at a disadvantage.
Security agencies, for instance actually end up paying some more additional duties. At the other extreme are mining contractors who pay an effective tax rate of 6.98 per cent, encouraging them to cut labour employed and rely on capital investment instead.
In fact out of the 75 sectors tracked by the Income Tax department, none of the labour-intensive sectors had tax rates as low as the capital-intensive ones. As the chart shows, all companies in the former group pay tax at rates close to the effective rates.
The effective rates of taxation for the latter are a third lower, at least. In the case of mining contractors and sugar manufacturers, the rates dont even reach double digits.
The same issue was also flagged by Rajiv Kumar, senior fellow at the Centre for Policy Research. He said if the Narendra Modi government wants to offer tax expenditure as a way to encourage investment in labour-intensive sectors, the thinking has to be out of the box.
MORE EMPLOYMENT, DOUBLE DIGIT TAX RATE
Sector/Effective tax rate (%)
Agro processing: 25.29
Electronics including computer hardware: 28.32
Banking companies: 30.54
Share and sub brokers: 29.24
Security agencies: 35.62
Sector/Effective tax rate (%)
Drugs and pharma : 18.69
Sugar manufacture: 9.98
Fertilisers and chemicals: 14.08
Mining contractors: 6.98