Everyone knows that India, which is called the largest democracy in the world, is characterized by glaring economic inequality. While the Indian economy is growing more rapidly than before, so is the gap between the rich and the poor. The ruling parties of the United Progressive Alliance (UPA) claim that theirs is a ‘pro-poor’ government.
In order to examine the veracity of this claim, youthful members of the Thane branch of Lok Raj Sangathan carried out a detailed investigation of the government’s policies regarding taxation, bank lending and interest rate on savings. Do these policies act against the tendency of the rich to grow richer and the poor to grow poorer? Or do they further facilitate this tendency? The findings of this investigation are presented below.
Economic inequality: How rich are the richest Indians?
More than one-third of the Indian population, or about 36 crore people, live on less than Rs. 50 per day. The average per-capita annual income is estimated at about Rs. 30,000, or about Rs. 90 per day. The vast majority of Indians — about 90% — are poorer than this average. How is this possible, that the vast majority are poorer than average? It is possible precisely because a tiny minority of persons are enormously richer than average.
Based on declared wealth and published data, Business Standard compiled a list of Indian billionaires (having wealth of more than Rs 100 crore) in January 2005. It came up with the names of 178 individuals and families. The total wealth of these 178 people is Rs 185,000 crore. The top 12 wealthiest account for about Rs 105,000 crore, with each one having more than Rs 2500 crore.
The three wealthiest (Azim Premji of Wipro – Rs 32,000 crore, Ambani brothers – Rs 24,000 crore, Sunil Mittal of Bharti Telecom – Rs 12,500 crore) account for one third of the wealth of all the billionaires in the list.
Forbes magazine of USA, which publishes the list of the richest men of the world every year, for the first time, published a list of 40 richest Indians in Dec 2004. The richest Indian as per this list lives out of India in England; Lakshmi Mittal of Mittal Steel is estimated to have the wealth of over $11 billion i.e., close to Rs 50,000 crore. Mittal Steel is now the world’s largest steel producer. Most of his wealth has been created by acquiring steel plants all over the world, particularly in East European countries, under the privatization programmes of various governments.
Tax policy – the poor pay a higher share of their incomes as taxes
Any individual with annual income of more than Rs 3 lacs is required to pay 30% of income above Rs 3 lacs as personal income tax in our country. Similarly, every company is required to pay 35% of its declared profit as corporate income tax. These are called direct taxes, which are collected by the central government.
However, what is not so well known is that the bulk of the tax collections of the central government come from indirect taxes like excise duty, customs duty and service tax, which are paid by every consumer of goods or services. So both the poor and the rich pay the same amount of tax when they buy any good or service. Sales tax is the largest source of revenue for a state government. A buyer pays it whenever he purchases anything. Here, too, the rich and poor pay the same tax. Since the poor spend a larger share of their income for their consumption needs, they end up paying a larger share of their income as indirect taxes.
All indirect taxes are supposed to be paid immediately, on a monthly basis. Yet, Rs 15,000 crore of indirect taxes have not been paid by the big industrialists; they remain overdue. And like income tax, Rs 12,000 crore of tax is being disputed by them.
Till a few years back, people were required to pay a tax on very few services used by them. Now, every year the government is taxing more and more services. In a few years’ time, service tax is expected to be as big a source of tax for the government as excise duty. Excise duty is paid at the time of production, whereas service tax and sales tax are paid at the time of purchase. Custom duty used to be the biggest source of tax revenue at one time. Now with India joining the WTO, custom duties are being reduced every year to bring them in line with the WTO commitment. So government revenue from custom duty is falling despite increase in imports. The fall in customs revenue is being more than made up through increasing service tax. This is yet another way by which the burden is passed on to the broad masses of people.
A consequence of all these indirect taxes is that most of the time we are not aware of how much tax we are paying! It is a myth that income tax is a bigger proportion of the taxes collected by the Government than indirect taxes. The Central Government collects Rs. 180,000 crores through indirect taxes while it collects Rs. 140,000 crores through direct taxes. (Indirect taxes collected by state governments and local bodies are in addition to this). Prices of goods are the same for everyone, regardless of income; also the basic needs of people are the same everywhere. Luxury items are just a very small proportion of the expenditure of the rich. So as a proportion of income, the poor pay more taxes than the rich!
Income tax exemptions are another way for the rich to multiply their wealth.
Thanks to various tax exemptions, individuals and companies pay much less tax than they are supposed to. There is a long list of incomes exempted from taxes, such as agricultural income, dividends from shares and mutual funds, long term capital gains on shares, investment in PPF and income thereon, investment in life insurance, retirement income like gratuity, leave salary, VRS proceeds, etc. The ironical part is that most of these exemptions benefit only the rich. So now we know that the rich build farmhouses in the countryside so that they can record part of their income as agricultural income, which is tax-free!
The tax exemptions that benefit the masses of people have limits imposed on them. As such, VRS is a cruel blow to an individual. After a lot of struggle, people are able to extract a respectable compensation in some cases, but if it exceeds Rs 5 lacs, the income tax is required to be paid on the VRS income. On the other hand, there is no limit to tax-free income from shares and mutual funds, which benefit mainly the rich. The budget presented by the UPA government in 2004, made any profit from the sale of shares, after holding for one year, exempted from tax (i.e. it reduced the long term capital gains tax to zero). Income from dividends from shares and mutual funds was exempted from tax last year on the plea of giving boost to the stock market.
The common man finds it very difficult to understand how many companies pay no tax or very less taxes even if they record huge profits. E.g. Reliance Industries paid no taxes for 10 years even after making record profits! Companies can get away with this because the rate of depreciation is calculated in two different ways: in one way for distributing profits among the owners and in another way for paying taxes to the Government.
The list of incomes exempted from tax is so long and the method of computation of tax for companies is so complicated that thousands of income tax lawyers are busy round the year in finding out how a company can minimize the tax to be paid to the government. Consequently, hardly any company pays tax at the rate of 35% of profit.
Both companies and the rich are expected to pay income tax at the time of receiving the income or in advance. Yet, the rich and the companies, as per the records of the government, even after enjoying all the tax exemptions, have not paid Rs 87,000 crore of income tax. A common trick used is to dispute the payment of tax and keep fighting legally. Knowing our legal system, the rich know how to take advantage of the loopholes. So, out of Rs 87,000 crore as much as Rs 70,000 crore is under dispute.
Like individuals, companies also enjoy various tax exemptions. India exports goods and services worth a whopping $ 7000 crores but no tax is paid on profits earned from these. Its garment exports are worth about $ 1000 crores and its software exports are around $ 1200 crores. Again, no tax is paid on profits earned from either of these. Profits made by factories set up in backward areas are tax-free for the first 10 to 15 years.
In addition to all these exemptions, the Central Government gives tax benefits in the name of encouraging new industries and employment. It exempts payment of excise duty in areas like J&K, Kutch, Uttaranchal, North East, and Himachal Pradesh. E.g.: HLL and P&G have set up plants in HP and Uttaranchal to save hundreds of crores of excise duty payment. The unjust part is that companies do not pay excise duty but still do not reduce prices. That is how they make their huge profits.
State Governments give companies sales tax benefits for the first 10 to 15 years to set up new industries. The total exemptions are sometimes 2 to 3 times the initial investment! One would assume that all these exemptions and benefits are given to industries so that more jobs are created. However, the money the Government doles out as tax exemptions is not related to the number of jobs created. The bigger the project, the bigger the tax exemption, but not necessarily more jobs!
Interest Rates and Lending Policy – means of transferring wealth from the poor to the rich.
For those living on their savings, like retired people, savings interest rates have become half of what they were. Presently, the interest rate on savings is just 3.5% to 6%. Consequently, the ‘real interest rate’ on savings is the savings interest rate (3.5% to 6%) minus the inflation rate (7%), which turns out to be negative! Isn’t it shocking to know that when one deposits money in a savings account, its value does not rise but actually falls!
While the banks collect our money at such low interest rates, they lend them out at much higher rates – the difference accounting for the profits pocketed by the banks. It is a well-publicized falsehood that the neediest people get loans at the lowest interest rate. The fact is that small borrowers get personal loans at 10% to 12% interest and housing loans at 7.5% to 9%, whereas, big companies get loans at 6.5% to 7%. The richer and bigger you are, the lesser is the interest rate you pay on bank loans.
The interest rate on loans given to big companies has dropped from 16-18%, to 6-9 %. The Prime Lending Rate (PLR), which is the rate at which the most preferred borrower gets a loan, is about 6.5%. Many big companies borrow at the PLR or at even less. As inflation is 7% at present, the ‘real interest rate’ for loans taken by big capitalists is almost 0% or negative! No wonder their profits are zooming. On the other hand, interest rates on personal loans are 9% to 12%. So to sum up, small borrowers get loans at high interest rates. Big borrowers get loans at very low or even negative interest rates. People get negative interest on their savings in banks. Thus, money goes to the rich without interest, with crores of people subsidising them through the banks.
Limited Liability and ‘Non-performing Assets’- devices to protect the capitalists
One keeps hearing of private and public limited companies. What does the word ‘limited’ actually refer to? It means that the liability of the owners is limited. Business enterprises are of three types: proprietorship, partnership and limited liability.
A proprietorship has one owner. All profits and losses are his and all his personal property is attached to the enterprise. The owner has to repay all the money lost by the enterprise, if needed even by selling his property. A partnership is the same as a proprietorship, except there are 2 or more owners. When the capitalists wanted to set up big industries without risking their wealth, they brought in the concept of limited liability.
The liability of the owners is limited to whatever money they put in as share capital. If the company makes losses, only the share capital is lost; other property and capital of the owners/shareholders is protected. So even if companies go bankrupt, nothing happens to the wealth of the capitalists. All this is legal! That explains how in Mumbai, so many textile mills went bankrupt, but all their owners are prospering and growing!
All the capital required to set up big factories is not share capital i.e. investments of shareholders. A major part of it is through loans. These loans are sometimes 100% of the share capital, and can sometimes even go up to 400% of the share capital. In India, the minimum loan amount is 100% of the share capital and banks easily loan up to 150% of the share capital, in some cases even up to 200%. These loans are for long terms like 10-15 years generally. For the first 2-3 years, as production is just beginning, the capitalists have to pay back just the interest, not the principal. If the company does not do well, some companies continue paying just the interest, not the loan installments. Some do not pay either. This is temporary for a period of 3-5 years, but in some cases it becomes almost permanent, continuing for 10-15 years. If it looks as if the banks can never recover these loans, they levy penalty interest. After 10-15 years, if the loans are still not recovered, the banks write them off and declare them as Non-Performing Assets (NPAs). Indian banks have NPAs worth over Rs. 1 lakh crore, mostly from big, not small, companies.
When interest and repayment installments are not paid for many years, loans are restructured. The banks negotiate with the companies to waive the penalty interest, or to waive part of the interest, or to reduce the interest rate from say 12% to 7%-8 %, or to extend the period of repayment. All the terms and conditions of the loans are reworked. This is called restructuring of loans. Big steel companies like ESSAR, Jindal, ISPAT restructured loans last year. Rs. 4 to 5 thousand crores of interest payments was waived for them. They profited by that much amount. Thus, big capitalists siphon off money from companies and make them sick. They turn loans into NPAs and get them waived or restructured.