Tax Incentives and Growth of Paper Industry in India

1 Tax Incentives and Growth of Paper Industry in India Punam Sachdeva, Research Scholar, Singhania University, and Associate Professor, Department of Commerce, Kalindi College, University of Delhi. Dr. Hem Chand Jain, Associate Professor, Department of Commerce, Deen Dayal Upadhyaya College, University of Delhi. ABSTRACT Corporate tax is an important direct tax instrument in the hands of the Government. A well devised fiscal policy can influence industrial growth by incorporating suitable corporate tax provisions in the form of incentives. Any tax incentive scheme of Government leads to reduction in tax liability, better financial performance, increase in reserves and surplus, acquisition of capital assets and stimulates investment in companies. The present research paper attempts to know the impact of corporate tax incentives on the growth of paper industry during financial year 2005-2006 to 2014-2015. As corporate tax liability is influenced by tax incentives and simultaneously tax incentives influence different variables leading to growth of an industry, this research work is an attempt to study relationship between tax incentives and variables signifying growth. These variables are of financial or non financial nature. The present work analysis is restricted to five financial indices selected as variables affecting industrial growth. These five variables are profit after tax, gross fixed assets, capital employed, reserves and surplus and shareholder s equity. During the period under study for selected companies the data of each of the five variables is compiled. The results indicate that on an average, the value of each variable is increasing every year throughout the period of review. This trend reveals growing nature of paper companies during the decade. A statistical technique of linear regression analysis is also used to observe the relationship between tax incentives and the increase every year in the values of five financial variables signifying growth of paper industry over a period of ten years. The data analysis through b coefficient, standard error, T value and R 2 value is shown in the tables. It is evident from the results that these variables are significant contributors to the growth of the industry. Hence it is concluded that the tax incentives have a favorable effect on the industrial growth of paper companies. A size wise analysis of the companies also witnesses positive industrial growth with varying magnitude. Therefore corporate tax incentive has been an important element of fiscal system and is conducive to industrial growth. Keywords Fiscal policy, Corporate tax liability, Tax incentives, Linear regression analysis, Industrial growth. INTRODUCTION Paper Industry occupies an important place in the manufacturing industries in India. This industry accounts for about 1.6 per cent of the world s production of paper and is the 15 th largest industry in the world. It includes various segments like paper printing and writing segment, newsprint segment, paper pulp, paper boards and packaging segment. Paper is basic necessity of modern era. It serves the needs of various cultural and industrial activities, art, literature and science. Advances in education, a fast growing middle class, strong growth of fast moving consumer goods sector like pharmaceuticals, cosmetics and organized retailing are the main drivers of demand for paper. It is a key segment of India s industrial economy because of its diversity of use. In India per capita paper consumption during financial year 2006 was 15.4 lbs., whereas it jumped to nearly 50 lbs. during 2015. So paper industry has become a very attractive market to the global business community. At present there are approximately 71 actively traded public limited companies in paper Industry listed on Bombay Stock Exchange website. These companies have generated vast employment opportunities for workforce. There are various tax incentives available to industries engaged in manufacturing activities. These incentives are linked either to investments or expenditures or income from business or profession. But their effect on industrial growth depends largely on the nature of incentives available at a point of time, the industry specific requirement of the State, the frequency with which they are phased out and replaced with new ones. Presently depreciation allowance under Sec.32, Investment allowance under Sec.32AC and deduction on account expenditure on scientific research under Sec.35, Amortization of preliminary expenses under Sec.35 D, family planning expenditure under Sec.36 (1)(ix) are some important incentives available to the industry. OBJECTIVE Corporate tax incentives tend to influence profits available after tax, capital compositions and other variables of companies. Therefore in each financial year corporate tax structure is reviewed to give tax benefits to companies so as to influence the pace of Industrial growth. This article is

2 an attempt to test empirically the impact of corporate tax incentives on the growth of paper Industry in India through a study of statistical technique. As corporate tax incidence reflects the benefits of tax incentives available to the industry, this study is confined to know the relationship between tax incentives and growth of paper industry. REVIEW OF LITERATURE Contributions on this subject have been made by researchers notably are: Ambirajan (1961) studied about the evolution, structure and future prospects of corporate tax in India. Singh (1971) examined provisions of depreciation of Income tax act with special emphasis on corporate financial decisions. Rao (1980) studied corporate tax system and observed that corporate tax rate was the highest in India. Lall (1983) studied the extent of tax savings due to fiscal incentives granted to companies and observed that companies large in size and new companies availed significant quantum of tax relief. Dr.Devender Singh (1985) empirically tested the hypothesis that corporate income tax does not adversely affect the growth of industry. Other researchers have also reviewed the corporate tax structure. Sarkar (2004) examined issues related to tax incentives in India and compared them with that of U.K., USA, and concluded that the tax incentive schemes had been successful in mobilizing savings and capital formation in India. METHODOLOGY The present research work covers a period of ten years beginning from financial year 2005-2006 to 2014-2015 with a sample of 20 companies of the paper industry. Tax incentives availed by companies is considered as independent variable having an impact on the growth of industry. Further the dependent variables selected as indicative of industrial growth are profit after tax (PAT), gross fixed assets (GFA), capital employed (CE), reserves and surplus (R&S), and shareholder s equity (SE). The data of these variables is collected over a period of ten years. The values of each variable for this period are compiled to observe their respective trend. Besides this a statistical tool applied for data analysis is linear regression model to know the relationship between tax incentives and dependent variables leading to Industrial growth. This relationship will further highlight how corporate tax incentives influence the values of variables signifying industrial growth every year during the decade. For further analysis all the Companies of paper Industry are classified on the basis of their size as Large, Medium and Small as under: 1. Large: Companies with an investment in Fixed Assets Rs.25001 Millions and above. 2. Medium: Companies with an investment in Fixed Assets Rs.10001- to Rs.25000 Millions. 3. Small: Companies with an investment in Fixed Assets Rs.1001- to Rs.10000 Millions. The explanation of variables selected is as follows: 1. PAT: Represents profits before tax after deduction of provision for direct taxes. 2. CE: Refers to total capital with reserve fund and borrowings. 3. GFA: Represents net fixed assets including cumulative depreciation, arrears, provision for impairments less lease reserve adjustment. 4. R & S: Refers to appropriation of profits meant for future contingencies. 5. SH.EQ.: Refers to equity of ordinary shareholders only. SOURCE OF DATA In this article data of twenty actively traded Companies on Stock exchanges has been selected and compiled from CMIE PROWESS database, CMIE (Centre for Monitoring Indian Economy Pvt. Ltd.) Mumbai. The figures for the above mentioned variables have been obtained from the financial data as appearing in the financial statements in CMIE PROWESS database. The database includes data sourced from the Stock exchanges duly revised by the PROWESS. RESULTS AND DISCUSSION In this section the effect of tax incentives on the growth of paper Industry for 10 years period is shown in following three parts: PART -1: Data analysis of average growth of selected variables for period of 10 years. PART-2: Data of all selected companies during the period under research. PART-3: Analysis on the basis of size of companies under review. PART-1 In this part data compiled depicts the growth of variables selected under the study for paper Industry. The data of variables for a period of 10 years for twenty selected companies is compiled and presented below:

3 TABLE-1: GROWTH OF VARIABLES (in Millions) FY PAT GFA CE RES. & SUR. SH.EQ. 2005-6 1457.125 7559.755 10306.540 7915.615 8282.995 2006-7 1925.735 8256.800 11684.260 9464.790 9609.285 2007-8 2118.200 8777.965 12590.950 10089.780 10458.480 s2008-9 2298.195 10113.660 14617.920 11383.590 11764.090 2009-10 2853.615 11842.750 15882.380 12349.820 12789.200 2010-11 3398.395 13490.990 17734.190 13836.640 14492.690 2011-12 3913.170 14686.920 20013.270 15779.850 16428.730 2012-13 4487.460 19340.900 22016.220 18444.090 16903.180 2013-14 5212.470 18397.540 25211.050 20674.840 21254.840 2014-15 5668.780 20121.520 28083.390 23301.820 23897.770 The values given in Table-1 reveal that profit after tax (PAT) is increasing year after year. It was 1457.125 Millions in 2005-2006 and has increased to 5668.780 Millions in 2014-2015. This increase is significant during the period under study. Thus a comparison of figures witnesses growth in profits. Similarly there is an increasing trend in values of all other four variables during this decade. The variables gross fixed assets, capital employed figures have increased every year in comparison to its preceding previous years. This rise in data can be attributed to growth of industry. Besides the reserves and surplus position of companies is also indicative of growth. The reserves were amounting to 23301.820 Millions in 2014-2015 as compared to 7915.615 Millions in 2005-2006. Further an upward trend in shareholders equity indicates growth compounding over time. Hence it can be derived from t he results of variables signifying growth that tax incentives positively affects the growth of paper Industry. PART-2 Regression Analysis Results and Discussion In this part the results of the impact of tax incentives on all the selected variables mentioned above are shown in Table-2 with their detailed analysis. TABLE-2 PAPER INDUSTRY- TWENTY COMPANIES. IN PAT GFA CE Reserves & surplus SHR s Equity 2.765 7.545 12.197 10.568 11.350 (0.374) (3.201) (0.951) (1.009) (1.631) T 7.376* 2.356* 12.823* 10.470* 6.955* R 2 0.87 0.40 0.95 0.93 0.85 The data analysis shown in Table-2 indicates that during a period of 10 years under consideration the profit after tax (PAT), gross fixed assets (GFA), capital employed (CE), reserves and surplus (R&S), shareholders equity (SE) are all favorable. The b co-efficient value of the variables is positive which indicates favorable relationship between tax incentives and the variables signifying growth. The standard error value indicates the reliability of results derived. The T values are sufficiently high at five per cent level of significance (risk of being wrong) with asterisk mark. These values are positive which confirm that tax incentives have a favorable impact on the paper industry s growth. To add to this R 2 value also reveals strong relationship between corporate tax and different variables explaining industrial growth. These results are conclusive evidence of paper industry s growth. As a consequence tax incentives have had a positive effect on the growth of paper industry at five per cent level of significance reflected by different variables explaining industrial growth. There is an important observation that the tax is not the isolated factor leading to industrial growth. There are other non tax considerations which contribute towards industrial growth. However, in this study the aspect of non tax considerations has not been taken into account. Tax incidence is the sole variable considered to examine its impact on industrial growth.

4 PART 3 Size wise analysis The results of selected companies of the paper Industry classified on the basis of their size as already mentioned in the Research Methodology above are shown in this part. The data analysis of the impact of tax incentives on growth of six large sized, seven medium sized and seven small sized companies in paper Industry is presented through Table-3, Table-4 and Table-5 respectively. TABLE-3 PAPER INDUSTRY- LARGE SIZED SIX COMPANIES. IN PAT GFA CE Reserves & Surplus SHR s Equity 3.153 6.958 12.562 11.369 12.587 (0.544) (4.111) (0.978) (1.457) (2.112) T 5.794* 1.692 12.834* 7.797* 5.957* R 2 0.80 0.26 0.95 0.88 0.81 An analysis of large sized companies in Table-3 reveals that the b co-efficient of all the variables is positive. It highlights that any change in tax incentives (independent variable) results in favorable changes in the PAT, GFA, CE, R&S, SE i.e.(dependent variables) signifying the growth of industry. At five per cent level of significance, a higher b co-efficient values, T values and R 2 values show that there is a significant impact of independent variable on dependent variables explaining growth of paper industry. Further standard error value in relation to b value is indicative of reliability of results. TABLE-4 PAPER INDUSTRY-MEDIUM SIZED SEVEN COMPANIES IN PAT GFA CE Reserves & Surplus SHR s Equity 0.950 9.785 15.926 7.833 7.911 (0.439) (3.990) (2.378) (1.697) (1.573) T 2.163* 2.452* 6.695* 4.615* 5.028* R 2 0.36 0.42 0.84 0.72 0.75 The medium sized companies data analysis is shown in Table-4 and the values indicate that tax incentives continue to remain significant at five per cent level for above mentioned dependent variables. So in case of medium sized companies also tax incentives have a positive impact on industrial growth in paper industry.

5 TABLE-5 PAPER INDUSTRY-SMALL SIZED SEVEN COMPANIES. REGRESSION RESULTS OF IMPACT OF CORPORATE ON DIFFERRENT VARIABLES IN PAT GFA CE Reserves & Surplus SHR s Equity 1.007 3.642 5.380 3.710 3.736 (0.316) (0.606) (0.834) (0.537) (0.545) T 3.178* 6.007* 6.450* 6.899* 6.851* R 2 0.55 0.81 0.83 0.85 0.85 In Part-3 of the study, while small sized companies are analysed in Table-5, the results show that the dependent variables PAT, GFA, CE, R&S, SE are positively influenced by tax incentives. It indicates that corporate tax incidence does not adversely affect the industrial growth. So in case of Small sized companies also tax incentives have a favorable impact on industrial growth. CONCLUSION A study of relationship between tax incentives and selected variables concludes that tax incentive is the significant tool of the industrial growth. The changing tax provisions and increasing values of variables namely profit after tax, gross fixed assets, capital employed, reserves and surplus, shareholders equity of twenty selected companies throughout the period of study is attributed to the growth of paper industry. Hence tax incentives positively affect the growth of paper Industry. Further linear regression analysis of the total paper companies indicates that tax incentives significantly affect each of the variables. The value of standard error, the T values at five per cent level of significance confirm a favorable relationship between tax incentives and variables explaining growth. A size wise data analysis of companies indicate that tax incentives can be asserted to be positively affecting the industrial growth as reflected by the values of dependent variables. Hence the impact of tax incentives on industrial growth in paper industry is favorable. It implies that corporate tax incentive does not adversely influence the industrial growth. But despite the fact that tax incentives significantly affect the growth of industry, it is not the only variable leading to industrial growth. There are various other non tax considerations responsible for industrial growth. However, in the present study this aspect of non tax considerations has not been taken into account. Tax incentive is the only variable considered to examine its impact on industrial growth in paper industry. REFERENCES [1] https://www2.deloitte.com/content/dam/deloitte/gl obal/documents/manufacturing/gx_us_consulting_ Turningthepage_06212012.pdf [2] Balakrishnan.P, and M Parmeshwaran, (2007) Understanding Economic growth in India: A prerequisite Economic and Political weekly 42(7):2915-22 [3] www.prowess.com CMIE PROWESS database, CMIE (Centre for Monitoring Indian Economy Pvt. Ltd.) Mumbai [4] C R Kothari, Gaurav Garg- Research Methodology, Methods and Techniques 2014, 3rd edition. New Age International Pvt. Ltd. Publishers, New Delhi. [5] David M. Levine, David F. Stephen, Kathryn A. Szabat,- Statistics for Managers,-using Microsoft Excel 7th edition 2014, PHI Learning Pvt. Ltd. [6] shodhganga.inflibnet.ac.in/bitstream/10603/13629/.../13_chapter%203.p.