I went on a twitter rant about how we deal with incentives:
1/ India has wrongly placed too much on tax incentives. From zero taxed exports to tax credit for home loans, we’ve distorted our economy.
— Deepak Shenoy (@deepakshenoy) November 23, 2015
2/ Take IT. Why didn’t the IT majors build great software for India? Because STPI (and then SEZ) rules said zero tax if you exported.
— Deepak Shenoy (@deepakshenoy) November 23, 2015
3/ If you sold to India, you had to pay tax on profits. If you had 75% exports, 25% local you paid tax on the 25%.
— Deepak Shenoy (@deepakshenoy) November 23, 2015
4/ Why bother with local at all? Discourage. Overquote. Do not invest. When the STPI sunset came in 2010, stuff for India happened.
— Deepak Shenoy (@deepakshenoy) November 23, 2015
5/ SEZs. We get tax free exports plus duty drawbacks for exports. Why? This discourages local consumption.
— Deepak Shenoy (@deepakshenoy) November 23, 2015
6/ Why do we like “export rejects”? Because the best stuff is exported, even if we in India would happily pay more in rupees for that item.
— Deepak Shenoy (@deepakshenoy) November 23, 2015
7/ Export minimums, incentives and crap like this have stunted Indian local growth – and then we talk of demographic dividend.
— Deepak Shenoy (@deepakshenoy) November 23, 2015
8/ Housing: We give FOUR different tax sops for buying a house. FOUR! Read: https://t.co/SaNimVOFJz
— Deepak Shenoy (@deepakshenoy) November 23, 2015
9/ Take those sops out and we will see the housing bubble go bust. But guess what, something magical will happen.
— Deepak Shenoy (@deepakshenoy) November 23, 2015
10/ When you see less capital go to housing, that capital will go elsewhere. Into businesses, into better investments. We’ll rock more.
— Deepak Shenoy (@deepakshenoy) November 23, 2015
11/ And why is long term capital gains tax zero on share sales? Take that sop away too. Unnecessary.
— Deepak Shenoy (@deepakshenoy) November 23, 2015
12/ Tax insurance returns except on death. Survival benefit is not insurance – it’s income.
— Deepak Shenoy (@deepakshenoy) November 23, 2015
13/ Once you remove these sops, you can cut the tax rate to 20%. And we will allocate better.
— Deepak Shenoy (@deepakshenoy) November 23, 2015
14/ The problem with removing sops is that other countries won’t do it, and we become less competitive? We anyhow counter-duty their goods.
— Deepak Shenoy (@deepakshenoy) November 23, 201
15/ Finally, we should encourage investment, not because of tax benefits but because it gets great returns.
— Deepak Shenoy (@deepakshenoy) November 23, 2015
What do you think?
Note: These are obvious simplifications; there is probably a good reason for every tax incentive. But there is such a thing as too much incentive, and like reservation for the “creamy layer”, it’s horrendously ineffective at some level. I believe that India has the chance to demonstrate to the world how a lower incentive system will work better.
By the way, you know why it’s so much more difficult to export than import? Because of duty drawbacks and export exemptions. If you export so much, you get x% back from the government. People abused this by exporting empty boxes. So now, every physical box has to be packed in the presence of a government official. Take away that incentive, and you’ll find that people squeeze out the margins from operations, and things get better with no bribe to be paid to a government official which is no longer a bottleneck for higher volume exports. And imagine the savings on government payroll when they don’t need that many people policing exports and signing cheques to release for exemptions.
I’d love to hear your thoughts!
