From Business World of 2 May 2005.
Use your strong points
Another budget has been put to
sleep. Mr P Chidambaram was hauled over the coals for his innovations this
year; he must be glad to put the budget behind him. But it is not certain that
he will be able to. For there are forgettable budgets – which is most of them.
There are unforgettable budgets. And then there are budgets that everyone
wishes to forget but no one can. This year’s budget was one of this rare breed.
It introduced two exquisitely
designed irritants: the fringe benefit tax (FBT) and the tax on cash
withdrawals (CWT). The principle of the FBT could hardly be faulted: if a
company spent on indulgences to employees, they were not legitimate business
expenses and should be taxed. The difficulty was identifying such pleasurable
expenses and deciding how far they were necessary to business and how far
favours to employees. On both, the Central Board of Direct Taxes (CBDT) put out
its judgment: it issued a list of expenses taxable under FBT, and the
proportion of them that would be taxed. After consideration the Finance
Minister removed some items from the list, and reduced the taxable proportion
on some items.
Companies will appreciate his
petty gifts. But he deliberately avoided better alternatives. The FBT is a
vexatious complication. Mr Chidambaram actually reduced corporation tax this
year; he could have left it alone and avoid the FBT. Having decided to
introduce it, he could have treated the fringe benefits as inadmissible
expenses, so that they would not be deducted from sales for calculation of
taxable profits. Instead, he had to introduce a special 30 per cent rate,
different from the corporation tax rate but not very different; that will
require the fringe benefits to be separated in accounts and give the taxmen
much opportunity to dispute the border line to their personal advantage.
Finally, all the detailed percentages of allowance make this tax a nightmare.
Mr Chidamabaram has confined the
CWT to withdrawals over Rs 25,000 by individuals and Hindu Undivided Families
and Rs 100,000 by companies from current accounts. Any of his illustrious team
of economists could have told him that this would lead to substitution – that
those who use current accounts would resort increasingly to savings accounts.
And then the Reserve Bank will introduce fresh restrictions on savings accounts
to make them unattractive to companies. This is the way to greater complication
and vexation. And all to what purpose? All that talk about audit trail fed to
the Finance Minister by his taxmen is hogwash. No sleuth who wanted to follow
the trace of sleazy cash withdrawals would tell all criminals publicly, “Before
you withdraw cash and fall into my trap, be aware that I shall be watching your
withdrawals, ask your bank to give me a dossier on it, and use it to nail you.”
This is the surest way of warning black moneymakers to make many small
withdrawals; that will be another channel of evasion. People must marvel how Mr
Chidambaram, perhaps the most intelligent minister in the cabinet, fell for
such mindless ruses of his minions. He has also told them to concentrate on
revenue and never to let go a chance to increase it. He probably does not know
what excesses are being committed by them in his name.
The plain truth is, that
innovations in taxation are passé. The center relies largely on taxes on
incomes, output and imports; from this year, most states too have agreed on a
more or less uniform structure of value added taxes. This is the international
norm; even import duties are an anomaly by international standards. The tax
rates are also close to levels in advanced countries. They hardly ever change
the levels of their taxes; in this country too, such changes must be largely
abandoned. Mr Chidambaram’s introduction of new taxes goes against the trend, and
postpones the day when this country will have a smoothly functioning tax
system.
A finance minister has
considerable freedom to do good or evil. In future budgets, Mr Chidambaram
should to use his enormous power to improve matters in those areas in which he
has a comparative advantage. He has one of India’s sharpest legal brains; if
there is ever going to be a finance minister who can master the complexities of
Indian tax law, it is he. He should use his talents to simplify the law – to
make it less an instrument of harassment and bribery and more a just instrument
of state power.
