Are we ready for real competition?

"Geneva: India is set to lose a major trade dispute with the US at the World Trade Organization (WTO)." "The programs that could be affected are export-oriented units scheme, electronics hardware technology parks scheme, bio-technology parks scheme, merchandise exports from India scheme, special economic zones and duty-free imports for exporters." Why is there a problem with special economic zones in India and not in China? Why does the US object to duty-free imports for exporters? After all, US companies could also take advantage of the scheme. "The US is the least protectionist country of the major powers. India is, if not the most protectionist, certainly one of the most protectionist," said US Secretary of Commerce Wilbur Ross yesterday. India disputes these claims citing other countries with high tariffs on certain imports but then, we lost at the WTO and they didn't. Previous to the introduction of the Goods and Services Tax (GST) the domestic producer had an effective customs duty protection of Rs 1.57 on a basic price of Rs 100 over an imported good, wrote H Ramakrishnan, while post-GST, the effective customs duty protection has risen to Rs 11,80%. "The effective protection on a value addition of 20% worked out to about 7.84% in the pre-GST regime and is a whopping 59% in the post-GST regime." This allows domestic industries not to invest in research or technologies necessary for innovation, they can sell old models at higher prices and the government earns higher taxes, both from customs and from high local prices. Recently, the Finance Minister "slashed effective corporate tax rate to 25.17 percent, inclusive of all cess and surcharges, for domestic companies". The tax cut will certainly increase net profits of companies, which can use the money for new investment or in paying higher dividends, but this will be offset by a higher fiscal deficit for the government. However, the benefit may not be as great as they are being made out to be because companies will have to give up all exemptions and deductions to avail of the lower rate and cannot go back to the older system once they have opted for the new rates. At the moment they can carry depreciation and net losses on their books for 8 years to adjust against future profits. So what is so great about the cut? Tax officers are set targets for collections. "These officers, facing revenue targets, often deny permissible exemptions, and even helpfully suggest that the company get full refund later through appeal," I Rajaraman. "However, in recent years, refunds seem not to have been forthcoming", which has incensed industrialists. So, the new flat rate should protect against unreasonable demands. A couple of months back there was a huge tax raid on a humble 'kachori wala' in Aligarh. Tax officers were preening in front of journalists. Turned out that the man is very poor and lives in a hovel. So what to do? High customs duties to keep out foreign competition and protect tax collections. Or low duties to please the US but a collapse in tax collections as domestic businesses fail. Real rock and a hard place.



















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