Sunday, January 2, 2011

[ZESTCaste] Give tax credits for affirmative action

http://www.thehindubusinessline.com/iw/2011/01/02/stories/2011010250661100.htm

Give tax credits for affirmative action

Krishnamurthy Vijayan

It is easier for a small company to create new work processes, but the
tax credit may not benefit it if profitability is many years away.

Some time back there was debate on if the private sector should be
asked to reserve jobs for the weaker sections. The private sector and
its votaries spoke about how this would reduce efficiency and hamper
meritocracy. If the reservation had happened, I am sure the stock
market would have reacted adversely.

After all, any hint that the quality of manpower in an organisation
will decline is negative for a company's prospects and its share
price.

But let's look at it from another angle: As an employer in an emerging
market, faced with rising wages and a dearth of talent, isn't it
worthwhile modifying work-processes and HR systems to tap into a new
talent pool?

Most companies and jobs do not require exceptional talent. Sincerity,
attention to detail and the knowledge of systems are the key to
productivity.

These jobs can be boiler plated and training systems can transform a
recruit into a specialist. If work is well planned, carefully
organised and documented into standard operating procedures and
manuals; and if a recruit is trained on them (through a combination of
class-room and on-the-job orientation), most tasks can be handled by
anyone.

Let us assume that the Centre wants to ensure that companies add, say,
10 per cent to their workforce every year and that 20 per cent of
these jobs should go to the physically challenged. One way of doing
this would be the old-fashioned way – just make it mandatory. But the
more effective way would be to say that "costs incurred towards
building an appropriate work environment and cost of salaries paid to
such employees can be charged at 150 per cent to the P&L account" or
"will get a tax credit of Rs 1 lakh per person employed".

The advantage of tax-credits over legislation is that companies that
wish to continue with their practices are free to do so and shell out
the usual taxes.

US models

Two such tax-credits in the US that would work even better in a rising
economy like ours are:

The Work Opportunity Tax Credit is a Federal tax credit incentive to
private sector for hiring individuals from 12 target groups who have
consistently faced significant barriers to employment.

Two new tax benefits are now available to employers hiring workers who
were previously unemployed or only working part time. These are a part
of the Hiring Incentives to Restore Employment Act. Employers who hire
unemployed workers this year may qualify for a 6.2-per cent payroll
tax incentive, in effect exempting them from their share of Social
Security taxes on wages paid to these workers after March 18, 2010.

In addition, for each worker retained for at least a year, businesses
may claim an additional general business tax credit of up to $1,000
per worker, when they file their 2011 income-tax returns.

Now let's go beyond what the US has done and make tax credits
tradable. A start-up or a small enterprise can enhance its revenues by
selling its credits to a large tax-paying entity, and thus convert a
notional benefit into a revenue stream. It is evidently easier for a
start-up or a small enterprise to create new work processes, but the
tax-credit may not benefit it if profitability is many years away. On
the other hand, a large, old enterprise may find it difficult to
change, but it can still buy itself some tax benefits. Large old
companies are going to create fewer jobs than small and new companies
anyway and legislation that facilitates a transfer of benefit actually
improves the efficiency of such a benefit.

Again this is an extension of an old idea – after all carbon credits
have been around for some time. Carbon credit trading has encouraged
new businesses to adopt non-polluting processes and environment
friendly programmes, without resentment; and old "smoke-stacks" can
off-set their polluting businesses by buying tax-credits, or creating
environment-friendly processes in new areas.

Legislation creates resentment and can be unproductive when quotas
remain unfilled. Tradable fiscal incentives, however, give businesses
a choice: Be innovative and improve profitability or continue with
business as usual and be profit-neutral. It can lead to quick wins in
the form of inclusion for all-round benefit.

(The author is MD and CEO, IDBI Mutual Fund. The views expressed are personal.)


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