TV Mohandas Pai & S Krishnan
The services sector is the fastest-growing sector in India, growing at 8.8%, and contributes the highest gross value-add and creates the most number of jobs. It contributes more than 60% of India’s gross value-added growth. Despite the slow-down in the post crisis period (2010-14), India had the fastest service-sector growth, with a CAGR of 8.6%, followed by China (8.4%).
Our tax laws incentivise automation, capital intensive and big industry at the cost of labour intensive and small scale industries which create more jobs. The manufacturing industry’s increased use of capital and automation, along with huge tax incentives, is leading to reduced employment growth in a labour-surplus country. For too long, India has incentivised big industry and more automation, discriminating against labour and jobs. While automation increases productivity, jobless growth will destroy our society. The accompanying graphic provides the revenue impact of top six tax incentives for corporate taxpayers during FY16 and FY17.
The impact of such lop-sided incentive schemes is reflected in the effective tax rate of companies in the manufacturing and the job intensive service sectors. The service sector which is more job-oriented had a higher effective tax rate of 30% in FY16, as compared with the 26% rate that applied to the manufacturing sector which adopts capital-intensive automation. This is one of the major reasons for lack of good jobs in the last decade. The accompanying graphic also shows the high effective tax rate that applied to some of the labour-dependent industries in FY16.
The Economic Survey 2016-17 highlights that India must generate jobs that are formal and productive, provide more bang-for-the-buck in terms of jobs created relative to investment, have the potential for broader social transformation, and can generate exports and growth. The apparel, leather and footwear segments meet many or all of these criteria and hence are eminently suitable candidates for targeting. The apparel sector is the most labour-intensive, followed by footwear. Apparels are 80-fold more labour-intensive than the automobile industry and generate 240-fold more jobs than the steel industry. The comparable numbers for leather goods are 33 and 100, respectively. This discrimination against labour-intensive apparel is also a reason for its decline and reduced competitiveness.
Low-wage employees (people with less than R20,000 salary per month) only receive 65% of their wages since 35% goes to statutory contributions to Employee Provident Fund Organisation (EPFO), Employee Pension Scheme (EPS), Labour Welfare Fund (LWF), Employees’ Deposit Linked Insurance Scheme (EDLI), and Employee State Insurance (ESI), etc. Low-wage employees do not have a 35% savings potential and therefore may prefer to receive these contributions today than benefit from them tomorrow. In addition, the two largest deductions of Provident Fund (PF) and ESI may not result in the best value for money for employees.
The Union government has announced a special package for employment generation and promotion of exports in the textiles and apparel sector whereby the government would bear the entire 12% of employers’ contribution to the Provident Fund for new employees in the sector earning less than R15,000 per month, for the first three years of employment. EPF is made optional for employees earning less than R15,000 per month. This is expected to leave more money in the hands of the workers and also promote employment in the formal sector.
In order to incentivise migration of low-wage employees from contract labour which pays largely in cash to avoid these charges to formal employment, the Union government should provide for the following up to, say, R30,000 per month apart from withdrawing the compulsory 12% employee contribution to PF, providing a choice to employees to decide if they want their employer contribution of 12% goes to EPFO or National Pension Scheme (NPS), and providing a choice to employees to contribute their health insurance premiums to either ESI or a private health insurance of their choice.
The finance minister in his 2015 Budget speech promised to reduce corporate tax rates from 30% to 25% with corresponding withdrawal of exemptions over the next four years. This year, he has reduced the corporate tax rate to 25% for companies with annual turnover of up to R50 crore.
The government can stimulate employment generation by reducing the overall corporate tax rate by 2% from FY18. This would result in a revenue loss of about R26,040 crore based on FY17 data. The accelerated depreciation rate could be halved, which would generate a projected positive revenue impact of about R27,173 crore based, again, on FY17 data. This can be done in the current session of Parliament before the budget is passed. This will level the field between capital-intensive, automated manufacturing & high capital investment, low jobs industries and the job-intensive service companies.
A reduction in the tax rates will reduce the cost of credit from the banking system over time and also reduce the cost of capital and make the job-intensive sectors more competitive. It will reduce costs for regulated industries as they get a cost-plus return. By lowering the corporate tax rate, the labour intensive industries will be encouraged to grow faster and create more jobs which is India’s number one priority. It will also enable the NDA to keep its promise of reducing corporates taxes by 2019.
Pai is chairman, Aarin Capital Partners, and Krishnan is a tax consultant. Views are personal