FROM THE TELEGRAPH OF 28 FEBRUARY 2006
Lucky and wise
An exercised
journalist asked P Chidambaram at his post-budget press conference whether he
would have to pay 12 per cent service tax on all the cash he withdrew from an
automatic teller machine (ATM). The finance minister was amused; he said the
tax would be on the service provided by the ATM, and not on the cash – although
he left a bit vague how that service would be valued.
Another
incredulous journalist asked how he expected to bring down fiscal deficit to an
incredible 3.8 per cent of GDP next year. Mr Chidambaram replied that revenue
had risen at 20 per cent a year for the past three years; if it continued to
rise at that rate, he had enough room to provide for desired expenditure and
bring down the deficit-to-GDP ratio. He talked of the virtuous cycle of growth
and investment. Virtuous it may be, but it is a cycle, and he is lucky he is
riding its crest. It is in the nature of the cycle that at other times, growth
and revenue will slump, and another finance minister at another time will find
it difficult to control his deficit.
Chidambaram is
also lucky in two other respects. Indian interest rates have come down
dramatically in the past five years; the central government paid 10.2 per cent on
average on its borrowings in 2000-01, and 8.1 per cent in 2005-06. So the government
increased its debt burden by 68 per cent, but its interest payments rose only
38 per cent. That bounty continues to bless Chidambaram. It will not continue,
for reserve accumulation has ended and interest rates have started rising. The
government has done nothing to reverse this; but it can enjoy the windfall
while it lasts.
And between 2000-01
and 2005-06, the States, by a combination of luck and self-discipline, raised
their revenue from 11.3 to 12.2 per cent and reduced their fiscal deficit from
4.2 to 3.1 per cent of GDP. They have been so flush that they have been parking
their money in the central government’s treasury bills. They will soon get
another gift from the Finance Commission, which has raised their share of
central revenue from 29 to 29.5 per cent. So State governments are no longer
the mendicants they have been for decades; the Prime Minister no longer has to
carry a 10-billion-Rupee note in his pocket for baksheesh whenever he goes to a
state ruled by the Congress, and the finance minister does not have to have
rescue packages ready for profligate States such as West Bengal.
So altogether,
Chidambaram was less stressed this year. Last year he imposed two disastrous
taxes – the fringe benefit tax (FBT) and the cash withdrawal tax (CWT). If a
finance minister needs money, it is not a great idea to impose new taxes. New
taxes mean new administration, new rules and new resistance; they invariably
fetch little in initial years. But Chidambaram felt pressed to raise revenue,
and this was his way of doing it. This year he did not have to indulge in such
follies. He could have abandoned earlier follies; but that is not his way. He made a couple of trivial changes in FBT
and said that he had talked to chambers of commerce and they told him they
would be satisfied with such sops. He scoffed at businessemen's complaints that
FBT imposed transaction costs on them; he said, how could they have incurred
any transaction costs when the tax return is not due till October? He might
have considered the possibility that they began to put systems in place to
calculate the tax before the last moment it became due, and that costs do not
become fictitious simply because they have not yet been paid. Instead of treating
objections to FBT as debating points, he should have seriously asked himself
whether he could achieve his objective with fewer hassles. One option had been
put to him – abolish FBT and add another ½ per cent to corporation tax. Another
is to disallow expenses that currently attract FBT when calculating corporation
tax. I myself consider FBT fundamentally wrong because it discriminates against
one form of corporate expenditure without any reason. If you tax unattributable
personnel expenses, then why not tax wages and salaries? And on what grounds
should either be taxed?
Chidambaram
cited the example of some firm in Chandni Chowk in Delhi which had been buying
demand drafts from firms and ‘laundering money’, and which was caught by CWT.
Just how it is illegal to buy demand drafts, and just why imposition of FBT was
necessary for monitoring cash withdrawals, Chidambaram did not explain. If I
had wanted to spy on big transactions, I would have asked banks for information
and told them to tell no one I was spying; I would certainly not have imposed a
tax with hullabaloo. He promised to reconsider the tax once something called
Annual Information Returns was in place. He did not say when that would be.
But Chidambaram
did make an important fiscal announcement – that he wanted to plan for
introduction of a General Sales Tax (GST) by 2010. He even put down a small deposit
on the plan: he raised service tax to 12 per cent, presumably as a step towards
a central GST of 12 or 16 per cent. The centre has had a value added tax (VAT)
of sorts since the 1980s; in other words, it gives business taxpayers rebate
for tax paid by their vendors on inputs when calculating their excise
liability. Yashwant Sinha started persuading States to move from their sales
taxes to a VAT in 2000. Finally, all the States except five ruled by non-UPA
parties adopted a VAT of sorts last year. But both the VATs are a travesty of a
real VAT.
Ideally, there
should be a single rate of tax, part of which would go to the centre and part
to the States; there should be a single tax administration and a single
treasury in which the tax is to be paid. What we have are two separate taxes
collected by the centre and the States with different tax administrations, and
many different tax rates. Businesses cannot set off central VAT on inputs when
paying the State VAT, or vice versa. These moth-eaten VATs are no advance on
the old excises and sales taxes going back to the nineteenth century.
Chidambaram means that they should be converted into a proper, unified VAT by
2010. It is ambitious, but ambition in a right cause is always to be commended.
During this year, however, let us see action in this direction, even if it is
only a committee to be chaired by the finance minister of West Bengal.
I have
deliberately omitted all comment on the expenditure proposals of the budget.
For I believe that the government’s monitoring of its expenditure is so poor
that the money achieves the government’s objectives to a negligible extent and
ends up mostly in the pockets of the undeserving and the powerful. A look at
the last outcome budget did nothing to correct my impression. This government
has two honest men, Manmohan Singh and Chidambaram, in command. I continue to
hope that they will put in place a machinery to convince the middle class that its
taxes are being used for a deserving cause, and do not just line the pockets of
the corrupt and the powerful.
