FROM BUSINESS WORLD OF 8 MARCH 2006
A lingering
mystery
I have been
trying to solve a conundrum for 15 years. When I was in government, I had
formed an extremely high opinion of P Chidambaram. I found him intelligent,
curious, receptive and reasonable. I was tremendously impressed by his
abolition of import licensing on inputs and capital goods in 1992.
So I have been
repeatedly surprised and disappointed by Mr Chidambaram’s tax innovations as
finance minister. In his first stint as finance minister in 1996-98, he imposed
the Minimum Alternative Tax (MAT). This is a tax on profits of companies which
are not liable to corporation tax because they have earned tax rebates and
concessions in excess of the tax they would have to pay. If they have earned the
concessions, they are entitled to them, and they should not have to pay tax at
all.
And Mr
Chidambaram imposed service tax. I was against this largely because it was a
bailiwick of the Central Board of Excise and Customs (CBEC), and because many
of the targets of service tax were small firms. Between CBEC and its sister,
Central Board of Direct Taxes (CBDT), the former is more corrupt, arbitrary and
oppressive. I am not against taxing services, but Mr Chidambaram should have
done it as part of VAT – and made expenditure on services deductible.
In his second
stint, Mr Chidambaram imposed three new taxes – fringe benefits tax (FBT),
securities transactions tax (STT) and cash banking transactions tax (CBTT). I
thought that FBT was entirely unjustified. Corporate profits are taxed. They
are calculated as the difference between corporate income and costs. Fringe
benefits are a cost. They must be tax-deductible, and not be subjected to tax,
any more than wages and salaries. And as to STT and CBTT, I am against
transactions taxes in general, since they obstruct market operations. There may
be good reasons for taxing some transactions. For instance, if a country wants
to discourage currency speculation, it may foreign exchange transactions. But
cash taken out of the banks is the least deserving of taxation.
Mr Chidambaram
has ignored criticism as a rule. But this year was exceptional. He appeared on
a number of television channels, and answered questions forthrightly. On the
basis of his answers, I am convinced that Mr Chidambaram is perfectly aware of
criticism, and has worked out answers in his own mind, whether he gives them in
public or not. On MAT, for instance, he said that the companies had made book
profits; this was a good enough reason for him to tax them. He obviously does
not distinguish between taxable and non-taxable profits; just because some sum
is called profits according to company law, it is fair game in his view.
Mr Chidambaram
ridiculed claims that FBT would impose disproportionate transaction costs on
companies; he said that such claims were premature because the tax was not due
till October. This is a non sequitur. The question is not whether some
unspecified companies had calculated transaction costs correctly, but whether
there would be transaction costs or not.
FBT, he said it
was levied in some other countries. This is a classic application of Desai’s
law. When I was in the government, if a bureaucrat had no good argument in
favour of something, he would argue that it was the practice in some admirable
country like the US, UK, Japan or whatever. This type of argument is quite
invalid; even if some utterly admirable person – say, George Bush – is
following some practice – say, pinching bottoms – one must ask oneself, is it a
good thing to do?
Finally, I was
really shocked by Mr Chidambaram’s ordinance overturning Supreme Court’s
judgment in the ITC tax case. Even if he thought that the Supreme Court had
erred on law – and he had to think so to consider issuing the ordinance – his
action was constitutionally improper. It reminded me of Indira Gandhi’s
self-serving, short-sighted constitutional amendments.
Earlier I used
to think that what I considered as Mr Chidambaram’s mistakes as finance
minister were the result of his lack of knowledge of economics. I can no longer
hold on to that excuse. He has had long enough to learn economics; and a finance
minister can call on the help of the world’s best economists.
Now I have come
to the conclusion that he does not believe in the principles of fairness and
justice that I do. He thinks no excuse is needed to deprive people of some
money. Which in my view is wrong, and dangerous; I continue to hope he will reform
himself.
