Taxing Half-Truths

This is election season. So, in keeping with the mood of the day, we’ll deal with the familiar area where economics and politics interact and blend into each other. Every now and then, some politician will stand up and berate the centre for not providing enough funds for Mumbai city. The logical course for this now-so-familiar harangue is as follows: highlight the city’s enormous contribution to the centre via direct taxes paid and then blame the centre for usurping these funds without spending a dime on the Mumbai’s development. This gets repeated often and – like any other fragment of gossip — acquires some modicum of legitimacy.

The truth is often far removed. Let’s tackle the issues one by one. First, the tax contribution. It is entirely true that Mumbai city collects and provides huge amounts of income tax to the centre. Figures and percentages keep varying, depending on which report you are reading or which politician you heard last. It is also true that only a fraction of that money gets back to the city for its further development. But, here begins the smokescreen.

The income tax collected by the city is indeed huge. But, is all of that generated by Mumbai city alone? Not really. Take the case of some of the highest corporate tax payers. For example, the country’s largest bank, State Bank of India, is among the top tax payers from Mumbai city. But, are its profits derived from this megapolis alone? Hardly. The bank has thousands of branches spread across the country, conducting banking business, making profits, which all show up in Mumbai because the bank’s headquarters are based in the city.

Take the case of another large private sector company, Hindustan Unilever Ltd. The company makes soaps, detergents, toothpastes and other such products across the country and sells them widely throughout into every corner of this vast landmass. But, when it comes to paying taxes on its total profits (which includes contributions from each and every sale that occurs in some village or tehsil), the lump-sum amount seems to emanate from Mumbai only because the MNC’s India headquarters are located in the city.

But, have you ever wondered why does everybody harp about direct taxes only? Why does nobody actually talk about Mumbai contribution to, say, the total excise duty kitty? The reason is: excise is collected at point of manufacture and most factories are spread out across the country, instead of being concentrated in one city or state or region.

The second part of the half-truth: does the government spend very little on the city’s development? Absolutely, no doubt about that. But, again there’s more too it than meets the eye — under the federal structure of the country, the centre pools all the central taxes received from the different states and then allocates resources from this pool to different states, based on a formula devised by a finance commission (which is changed every five years). In addition, the centre also launched a scheme called Jawaharlal Nehru National Urban Renewal Management to improve the civic infrastructure of all major metro in the country. Resources are allocated based on certain criteria. People should ask: have the state government, or the city authorities, met all the conditions?

People should not get sold on half-truths about the city. Or get swayed by emotion-tweaking statements about the city’s contribution. In all of this, the city’s actual problems get dwarfed and its real contributions obfuscated.

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One thought on “Taxing Half-Truths

  1. As the story goes, God took a rib out of Adam and gave him Eve saying ‘life will be great from here onwards..’ The rest, as we know it, is the history of mankind. Since we are all products of half truths in any case (and that too from the big G), it is unnatural to expect us to state or believe in anything else 🙂

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