FROM THE TELEGRAPH OF 1 MARCH 2005
Pointless overkill
Corporate income that is paid out
as wages and salaries is taxed in the hands of recipients. If it is not so paid
out, it is taxed as profits of the company. Thus, personal income tax and
corporation tax are the same tax on income; only the base differs. The richer a
taxpayer, the less he needs his income, and the happier is a government to
deprive him of it; that is glorified as progressive taxation or redistributive
justice. There have been bizarre episodes in our history when finance ministers
mistook companies for human beings and levied progressive taxes on them; but
such stupidity is rare in that breed, and corporate taxes are generally
proportionate.
Companies are easy to milk; and
since they need to keep accounts just to stay in business, their income is easy
to estimate. So they are a favourite target of tax authorities, and have
generally paid more tax on their income than the richest individuals. But such
heavy taxation also creates incentives for evasion. Instead of paying employees,
companies pay their expenses. Since companies can write off expenses and
employees cannot, income buys more if spent by companies.
The finance minister would call
this outright robbery: the fisc is being denied its rightful share. Perquisites
enjoyed by individual employees were always added to their income and taxed in
their hands. Now Mr Chidambaram proposes to tax such perquisites at the rate
applicable to companies if their benefit does not go to identifiable employees;
expenditure on feeding and transporting employees is excluded. He could have
said that perquisites would be disallowed as deductible expenses. But that
would have been too clear.
Three questions need to be asked
about this stratagem. First, how justified is this? Many enterprises provide a
better environment than employees would have at home. The more valuable an
employee, the more employers try to make his working life enjoyable. IT firms,
for instance, have waterfalls, lounges, jacuzzis and meditation rooms to
beguile workers. They do not do this out of magnanimity, but because they have
to compete for workers. These are not perquisites; they are business expenses.
Second, how easy would such expenses be to identify? The borderline between
facilities for, say, clients and those for employees is bound to be hazy. And
the hazier it is, the more scope it will give tax officials to harass and earn
illegal gratification. And finally, how much more revenue will it bring? The
finance minister proposes to dig through a mountain to make little molehills.
