The 58,000 crores

There has been an argument going around that Mumbai contributes 58,000 crores by way of taxes each year and we get nothing much in return. I agree with the spirit of the argument, but the figure seems to have come from adding up income and corporate taxes from Mumbai. If so, then it is inaccurate. A company might have its plants all over the country, but it will have its headquarters in Mumbai. The corporate income tax that it pays will be on the value added all over the country, but counted on Mumbai’s account. The right way to calculate the figure is to look at the value added by Mumbai and try to find out how much we are paying out of it by way of taxes. I am guessing this calculation is much more complicated. If only we replaced all taxes, including excise tax, octroi and income tax with a single VAT…. (Also read Nilu’s proposal that all taxes should go to the states and then they should contribute a fixed percent of them to the Centre. I agree with it)

I am sure that even there it will turn out that the city is shortchanged by a large margin, but it is important to point out this inaccuracy nonetheless before others do.

6 thoughts on “The 58,000 crores

  1. Hi Ravikiran
    I think it would be of great benefit the economy of India if the government were able to shift the tax burden off of companies and on to citizens. Why? Well, for one thing, taxes on the means of production are inherently inefficient since it creates less production. The economic models show this, and the effect can be quite dramatic over many years. Also, if people pay taxes, they will demand more for their money or demand their money back.

  2. Michael, the only problem with that is that given the state of tax compliance in India, the only people left to pay taxes would be people earning a salary – They are a small minority of earners.

    On top of that, they are underrepresented in our legislatures. That’s because there has been a moratorium on redistricting constituencies in India since 1971. The stated reason was to avoid rewarding states that have failed to control their population. The actual result is that cities are now grossly underrepresented because the constituencies do not reflect the urbanisation that has happened in the past 34 years.

  3. The McKinsey report on Mumbai put the amount at 40,000 crore. In their calculations, they have discounted the amount from the corporate tax which they say is “collected in Mumbai but generated outside”. They have included just 25% of the corporate taxes in the amount. I don;t know on what basis this 25% figure came about, but at least there has been an awareness of the inaccuracy in the 58,000 figure from McKinsey;s side.

  4. Hi,

    The claim that Mumbai contributes Rs 58,000 crore of taxes every year is not way off the mark. Here’s how the numbers can be worked out. Mumbai contributes 5% of India’s GDP. But it’s tax contribution is higher than 5% because an urban economy is more tax intensive. There is no agricultural activity in Mumbai. Incomes here are higher than the national average. And the consumption basket too is skewed towards high-tax items (such as cars).

    So McKinsey and Bombay First have assumed that though Mumbai accounts for 5% of India’s GDP, it could be contributing about 15% of its taxes. Using the latest budget numbers and we get a figure of around Rs 45,000 crore. Do the same calculation for state taxes. Then the Rs 58,000 crore seems a believable estimate.

  5. If Mckinsey has done the required corrections, then 45,000 is the figure I am looking for. The argument was over how much we are paying the Centre and what we are getting in return, so I wouldn’t add state taxes to the mix. I am perfectly confident that we are getting shafted by the state too. So if we do a thorough estimate of how much the rest of the country is shafting us by, chances are it will be a lot more than 58,000

    Of course, if we had the kind of VAT I was talking of, 5% of the GDP would work out to 5% of the taxes.

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