FROM BUSINESS WORLD OF 5 FEBRUARY 2006
Manage your
expenditure
It is that
dreaded month, February. While his potential victims shiver in anticipation,
the finance minister has just finished rubbing shoulders with the high and
mighty of the world and returned invigorated by the bracing air of Davos. He
has finished chastising the developed nations for taking away investment funds
from developing countries, and can now concentrate on chastising the developed
people of India.
It is not a
prospect they fancy, for they have rich experience of P Chidambaram’s taxing
predilections. Almost a decade ago he invented the service tax, that bane of
many small advertising agencies and accounting offices; it was clever of him to
leave his brother lawyers out of it. A year ago he freshly minted two new taxes
– the cash withdrawals tax and the fringe benefits tax. Typical as it is of the
taxes he invents, both taxes are more trouble than they are worth. Cash
withdrawals tax (CWT) is easy to evade, and would fetch little, especially
after the relaxations he gave. The fringe benefits tax (FBT) has imposed
enormous administrative costs on companies that have to pay it, and created new
opportunities for corruption.
As a result, the
finance minister’s stock with taxpayers is not very high at the moment. There
are two versions of his prebudget meetings with industrialists last December.
According to one newspaper, a dozen of the 30 invited did not turn up.
According to the same newspaper the next day, he had actually invited a dozen
less than usual, dropping the biggest names. Attendance at his meetings would
not be an accurate indicator of his popularity, for even the richest –
especially the richest – taxpayers would not wantonly take the chance of
annoying him. Those that did turn up told him what a nuisance FBT was. It is
not the only nuisance. The tax authorities’ insistence on tax deduction at
source has forced even small landlords to seek registration, with all its
attendant harassment, and no doubt led many of them to prefer taking rent in
cash. The fear of contact with the taxman is a powerful incentive to tax
evasion.
There are signs
that he is aware of the unpopularity. In an effort to counter it, the Central
Board of Direct Taxes (CBDT) has promised to give rich taxpayers red carpet
treatment, and to set up plush reception centres for them in tax offices. But
given the choice, they would rather not visit the taxman at all. They would
prefer taxes that are few, easy to calculate, difficult to contest and free of
harassment.
Much can be done
to make them so: the number of taxes can be reduced, the rules can be
simplified, and they can be made fairer. What is the logic in charging
taxpayers astronomical rates of interest on tax delayed, and giving them
nothing or a pittance on tax refunds or on excess taxes paid? This is an
especially sore point with corporate taxpayers, for tax officers are set
collection quotas by their superiors, and are in the habit of ringing up
taxpayers and asking them to deposit taxes far in excess of what is due. One
indicator of the ubiquity of this evil practice is the tax refunds that are
given in April-June every year. In effect, the finance ministry shows a
fictitious figure for the annual rise in revenue, and then quietly brings it
down when no one is looking.
It is remarkable
that Mr Chidambaram is so well qualified to clean up tax rules and practices,
being a lawyer, but has never used his talents to do what he would be best at.
Everyone knows how busy he keeps; but somehow he has not found time to do
something that would leave his mark on the ministry, something that harassed
taxpayers would remember him for. He could still do so.
He may well
argue that he is doing the job he has been given by his Prime Minister, his
government, and his allies – which is to raise lakhs and lakhs of crores for
poorly monitored programmes for the poor. But there are intelligent and stupid
ways of raising money as well. FBT and CWT belong to the latter category;
taxpayers would thank the finance minister if he abolished them and just
notched up income tax by a point or two.
However, this
country is coming to a point that advanced countries reached years ago. They
decided that stability in the tax regime was more important than raising a few
crores here and there. So their tax rates hardly ever change; and new taxes are
unheard of. The art of their finance ministers lies in making the best use of
the revenue they are going to get. It is time the finance minister left taxes
alone, and improved his control on expenditure.
