I am back! And with a lot of material / nonsense / thoughts / experiences to share. Let's start with an exciting topic - taxes!
Recently I posted a quick comment on Facebook about quirky corporate tax laws in India, and sensed that there was some interest. So this piece talks more about a few specific issues on corporate taxes, advance tax withholding.
Before I get into the specifics, let me share some interesting background. A friend asked me what the corporate tax rate in India was. In order to answer that question, and provide some comparisons, I have plotted the corporate tax rates for a few countries:
(Click the picture to see a larger size image)
Some interesting takeaways here:
- US, the bastion of capitalism and free markets, has the highest corporate tax rates in pretty much the entire world (40%). It was awarded the first position when Japan dropped its tax rates to about 38% last year (March 2012)
- I used to think that the US and UK have similar policies towards openness, free markets, government involvement, etc. The corporate tax rates suggest otherwise: 23% vs. 40%
- India is at 32% - definitely on the higher side. China is at 25% and Hong Kong is at a paltry 17% - roughly half of India's. Yes, we have finally beat China on some dimension! :)
- Another surprise to me was that some of the European nations that I thought were nanny states & would charge higher taxes - France, Belgium, Sweden, etc - don't actually have very high tax rates (relatively speaking)
Anyway, now getting back to the interesting intricacies of the Indian tax system that I wanted to write about:
India has a concept of TDS (Tax Deduction at Source). This was adopted to prevent non-payment of taxes. The overall scheme is straightforward - every business is required to hold back 10% on all vendor payments and is required to deposit these to the government as advance tax on behalf of the vendor. The vendor can then account for these appropriately when it files its taxes at the year end. The Indian government also charges 12.36% Service Tax on all services rendered by organizations (similar to sales taxes charged on products). This is where the fun starts:
Say you are a consulting company that is raising an invoice of $1M. Your client will pay you only $900k and will deposit $100k as advance income tax (TDS) on your behalf. You will also have to deposit service tax of $110k immediately. So you end up getting $790k in your hands. Note that this is before you have made any profits or accounted for any costs. Now say you are a growth stage company and you planned to reinvest the $1M completely. This means that you end up with a loss of $110k (due to the service tax). You are still ok with it and file your taxes at year end, asking the government to return your $100k of advance income tax, since there wasn't any income. The fun thing is that the government will take its own sweet time to return this money (we are still waiting for our return from last year). But it tries to be good, and promises to pay you a 6% interest rate on the delay. You decide to ignore the fact that the delay is not counted from the day when the TDS was deducted, but from the end of the financial year (Really? So you are going to enjoy the float on my money?). Then the government tries to generally start messing with you and slips in the fact that this 6% interest will be taxed as income (WTF!). Add to this the fact that inflation in the country is 11%, so effectively the 6% return is a -5% loss in real income anyway. By the way, if you are a start-up, you know that your real cost of funds are orders of magnitude more than 6%, so that $100k getting delayed by a year kinda hurts. Anyway, you hope that life would be fair and that any delays in your tax filing would be treated similarly. Ha ha ha - hard luck - apparently when money is owed BY the government, it will pay you 6%, but when it is owed TO the government, you have to pay them 18%. By this time, you give up and utter that phrase that most Indians speak when they hit a brick wall with the system - "Mera Bharat Mahaan"
So that was the interesting tidbit I wanted to share. Before I wrap up, another juicy fact related to taxes. Recently, I found out that the Municipal Corporation of Gurgaon was sitting on about Rs. 650 Cr (~$130M) of surplus corpus from previous year. What did the MCG do with this money in the last 12 months? Did it put this sizable money into developing parks? Or maybe they improved the road light situation. Who knows, they might think of improving the roads. No, no, and no. Our local government, in all its wisdom, decided to put the money into fixed deposit saving schemes, earning 9.85% interest rate. Remember that 9.85% is less than inflation, so the real return is negative / close to zero. This is absolutely criminal - the MCG can think of no useful way to use this surplus cash to make the lives of the residents any better!
This coming year again they expect a surplus of some Rs. 300 Cr or so. Guess where that's going.
Mera Bharat Mahaan!
More later. Let me know what you think about the post.
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