The prolonged job crisis is now getting increasingly reflected in the growing demand for reservations in private sector by political parties and governments for the local youth. From Gujarat to Karnataka to Jharkhand and Andhra Pradesh, more and more states are promising this and/or have made such laws in the past several years.

The BJP’s poll promises for Punjab, where polling is over and a new government will take charge next month, include 50% quota, and the BJP-led government of Haryana, which will go to polls in 2024, has brought a law seeking 75% jobs in private sector for the locals.

Punjab’s Congress chief minister Charanjit Singh Channi had declared bringing such a law in the run up to the elections.

The new law passed by Haryana, which came into effect from January 2022, mandates 75% quota for the local youth earning less than ₹30,000 a month, the violation of which will attract a penalty of ₹10,000 to ₹2 lakh. It sparked protests from industry associations, which went on to obtain a stay from the Punjab and Haryana High Court. Last week the Supreme Court removed the stay saying that the high court’s order didn’t provide “sufficient reasons” for the stay.

The case is now back to the high court which would hear the parties again and provide sufficient reasons to justify its earlier stay order.

If not revenue, private industry should give jobs

Soon after the Supreme Court’s order vacating the stay, Haryana chief minister Manohar Lal Khattar justified his law and responded to the charge of regressive move which will deny jobs to youth from neighbouring states. But his argument raises several questions worth considering.

Khattar told a national daily: “...since GST has been rolled out, the industry is not a main source of revenue. GST has made revenues consumption-based. The industrial sector still wants concessions related to land, tax benefits, cheap electricity. When industry is not providing revenue, the only benefit is employment generation.”

The GST is an indirect tax; state governments have given up their rights to impose several indirect taxes. Though GST is equally shared between the Centre and states, the unease of states is reflected in their demand to continue the GST compensation from the Centre beyond the period of five years initially mandated in the law. Direct tax paid by industry (corporate tax) goes to the Centre’s kitty (although here too states get a share).

Khattar’s statement about losing money from industry is to be seen in this context. As for his gripe about private industry continuing to enjoy government largess in the forms of cheap land and electricity (both state subjects) and various tax incentives, this not without valid reasons. That enough jobs are not being produced in the economy is quite a different matter (growth slowing down, job creation not keeping pace with growth because of advanced technologies are cutting down the need for human resources, etc.).

The legal validity of his move may be under scrutiny but he has a point about the privileges private industry is getting from governments (Centre and states) when the same is not available to people in general and job creation is not getting the priority it deserves.

Less subsidies for poor, more tax incentives for rich

For example, despite two years of pandemic causing immense loss of jobs and businesses, subsidies for the poor, mainly in the form of food and fertiliser subsidies, have been drastically cut in the Centre’s latest budget. From ₹4.3 lakh crore in FY22 (RE), food and fertiliser subsidies were reduced to ₹3.1 lakh crore in FY23 (BE) — that is, from 11.3% of the total budgeted spending to 7.9%.

Incidentally, the food and fertiliser subsidies were unusually high in FY21 because of off-budget financing. The budget documents reveal that food and fertiliser subsidy went up from the budgeted amount of ₹1.86 lakh crore for FY21 (actual for FY20 was ₹1.89 lakh crore) to ₹5.6 lakh crore in the revised estimates for FY21 — a jump by ₹3.7 lakh crore. The ‘actual’ food and fertiliser subsidies for FY21 turned out to be even higher, ₹6.7 lakh crore.

This is when the latest ICE360 Survey 2021 by Mumbai-based think tank People’s Research on India’s Consumer Economy (PRICE) showed the income of the poorest 20% plunged 53% in five years between FY16 and FY21, while those at the top “surged” during this period.

Tax incentives to corporates have, in the meanwhile, gone up.

The budget documents show, for the first time in the new GDP series, corporate tax collection fell below income tax from non-corporates in FY21 — ₹4.46 lakh crore of corporate tax against ₹4.59 lakh crore of income tax from non-corporates. Incidentally FY21 was also the year of historic corporate profits in a decade as Fortune India’s analysis of listed companies shows.

Tax foregone to corporates also went up in FY21. Although in absolute number, tax foregone went down from ₹1.8 lakh crore in FY20 to ₹1.7 lakh crore in FY21, in terms of total corporate tax, tax foregone to corporates went up from 32.1% (of total corporate tax collection) in FY20 to 36.3% in FY21, reflecting more loss of tax from corporates.

The corporate tax foregone is actually far higher than this.

That is because of several accounting changes the Centre introduced starting with FY16. Three key changes are:

  • Nomenclature of ‘revenue foregone’ to ‘revenue impact of tax incentives’ to give this loss a positive spin;

  • Stopped showing central excise (indirect tax) foregone from FY18, saying that it was merged with the GST even when petroleum and petroleum products were (still are) out of GST’s ambit and the Centre earns a huge revenue from central excise (thus, hiding a part of the indirect tax lost); and

  • Indirect tax concessions were divided into ‘conditional’ and ‘unconditional’ ones; ‘unconditional’ ones were not counted on the plea that these were meant for all industries because of certain policy imperatives of the government.

These accounting changes reduced the corporate tax foregone.

Had these changes not been made and the old method of counting all indirect tax foregone been employed, the total corporate tax loss for FY21 (excluding loss of central excise, which is not available) would have been ₹3.3 lakh crore — nearly twice the ₹1.7 lakh crore shown in the budget documents.

Here is how.

The revenue foregone to corporates for FY21 is ₹1.03 lakh crore in direct tax (corporate tax) and ₹62,773 crore in ‘conditional’ indirect tax (only in customs, not excise), taking the total to ₹1.7 lakh crore. If ‘unconditional’ indirect tax (only customs) foregone of ₹2.31 lakh crore is added, the total tax foregone comes to ₹3.34 lakh crore.

As per this method, tax foregone to corporations stands at 73% of the total corporate tax collections in FY21 – not 36.3% as per the new accounting, which removes a large chunk of indirect tax foregone as ‘unconditional’.

If the central excise tax foregone is added (not shown in the budget) the total tax foregone to corporates would be much higher. The Centre collected ₹3.6 lakh crore in central excise in FY21. How much of it was foregone is not known.

There is yet another tax incentive to corporates.

In September 2019, corporate tax was cut from 30% to 22% for existing firms not seeking any tax exemption or incentive and from 18% to 15% for new manufacturing units, reducing corporate tax to the extent of ₹1.45 lakh crore. This is not a one-time tax cut. The 22% slab continues and the 15% tax for new manufacturing units has been extended till FY24.

The impact of this tax cut has not resulted in higher investment and job creations as the Centre had said but certainly reduced corporate tax collections, as the data shows.

Then there is annual writing off of loan defaults by big corporates, euphemistically called non-performing assets of banks (NPAs). Many corporate defaulters are known to be wilful defaulters — that is they are capable of paying but don’t, instead divert and siphon off loans to tax havens and then flee the country. Between FY15 and FY21, scheduled commercial banks (SCBs) have written off ₹10.7 lakh crore. In FY21, the NPA write-off amounted to ₹2.08 lakh crore.

Compare the Centre’s expenditure on food and fertiliser subsidies for the poor and the tax incentives, tax cuts, tax foregone to corporates to get a picture of the skewed economic thinking of the time. Add cheap land and electricity to the deal and the scale is heavily tilted in favour of corporates.

While most industrialists and economists call incentives (budgeted expenditure on food and fertiliser) to the poor a “subsidy’, a “wasteful” expenditure and a drag on economy and hence should be reduced or eliminated, rarely such calls are made for cutting tax incentives, tax foregone to corporates or imposing higher tax on corporates.

Khattar's frustration is understandable, but then states and central government can very well first fill several lakhs of vacancies in their own departments, ministries, PSUs, schools, colleges, hospitals and health centres they run. The Indian Railways’ recruitment drive, delays in which led to widespread agitation, began in 2019 and is as yet to be completed. How many government vacancies exist is not known.

Recently, the Centre told the Parliament that its departments and ministries had 8.7 lakh vacant posts as on March 1, 2020. There is no comprehensive data on all government vacancies. The same statement said the Centre had filled 78,264 vacancies in 2021, but didn’t disclose the total posts lying vacant as on March 1, 2021.

The naive would deduct 78,264 from 8.7 lakh vacancies in 2020 to say that the total vacancies stood at about 8 lakh as on March 1, 2021. But that could be wrong by a big margin. Because, the same reply of the Centre shows the vacant posts rose from 6.8 lakh in 2018 to 9.1 lakh in 2019 and fell to 8.7 lakh in 2020. The Centre recruited 38,827 in 2019, 1.48 lakh in 2020 and 2021. Clearly, the gaps between the vacancies and recruitments don’t match. This is for a valid reason: Fresh vacancies are created every year as people retire.

So, for Haryana and other state governments a beginning can be made by first putting their own houses in order: declaring and then filling all the vacancies in their own departments, ministries, schools, colleges, hospitals, etc. This should precede any demand from private sector to set out a quota for their youth. The Centre should also follow suit.

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