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PC’s Two Fatal Follies

Omkar Goswami


Had P. Chidambaram omitted two paragraphs of his Budget speech, his scorecard would have been 9 out of 10 — not only immediately after the speech but also several hours later, when the fine print began to matter. After all, he had increased outlays on infrastructure; focused on the social sector; cut peak customs duty from 20 to 15 per cent; rationalised excise duties; reduced the income tax burden; cut the corporate tax rate to 30 per cent, notwithstanding a higher surcharge and lower depreciation benefits; and didn’t raise the services tax rate. It was a masterly performance, and Chidambaram could have ended on a high note.


But he hasn’t, thanks to two tax proposals that are plain wrong. The second — tax on cash withdrawals from banks exceeding Rs.10,000, outlined in para.177 of the speech — drew howls of protest from Parliamentarians themselves. The first — the Fringe Benefit Tax of para.160 — escaped immediate notice until one started reading the Finance Bill. It was by far the worse of the two.


The Banking Transaction Tax, allegedly to uncover black money, imposes a 0.1 per cent tax on every cash withdrawal or cash purchase of bank drafts exceeding Rs.10,000. The black money explanation was pure baloney because of the hundred ways of detecting black money, this isn’t one of them. It was a revenue collecting mechanism. Here’s an idea of how much Chidambaram could collect on this account. Let’s assume that 5 per cent of urban India (165 lakh people) withdraws Rs.30,000 per month for household needs. On that alone, he will collect Rs.594 crore (165 lakh x Rs.30 X 12 months). Add to it 5 per cent of corporate wages which is paid in cash, and the petty cash that is kept for daily use, and Chidambaram is looking at Rs.1,200 to Rs.1,500 crore. Lot’s of revenue. But black money uncovering? Zero.


Now for the more egregious folly — the Fringe Benefit Tax. Suppose your company sent you to attend a conference. Your employer will have to pay 30 per cent tax on a fifth of your hotel, airfare and other conveyance costs and half your conference registration cost. Henceforth, a fifth of Hindustan Lever’s cost on sales promotion and publicity will be taxed at 30 per cent. If an Infosys employee stays in a company guest house, the company will have to pay tax on half of the imputed “fringe benefit”. If ICICI Bank took a potential client out for lunch, half the cost will be taxed at 30 per cent. There is no set-off against this tax, and it will have to be paid even if the company was a zero-tax entity. The list is huge. It is an unjust levy on bona fide corporate expenditure, instead of being a rational tax on income.


Everybody that I have spoken to has come out strongly against the Fringe Benefit Tax. CEOs are mad it because most of the clauses are akin to tax on expenditure for the running of business. The Left will hate it because it forces employers to be taxed on the Leave Travel Allowance and their contribution to the employee provident fund. And everyone should protest because it will give a field day to income tax officers.


Why did Chidambaram agree to these taxes? Here’s my guess. After reducing personal income tax liabilities and the corporate tax rate, there was a large revenue hole. Cutting  depreciation by 10 percentage points wasn’t enough. So the gnomes of North Block came up with these taxes. It gave them more discretion in dealing with companies while imposing greater compliance cost on taxpayers — both of which they love. Moreover, the babus ensured that the Fringe Benefit Tax didn’t apply to the government. So, secretaries can fly to Washington, attend conferences, stay at hotels and guest houses, and be transported by white Ambassadors without the government paying any Fringe Benefit Tax. It was their way of levelling the playing field, while meeting the deficit targets.


I would be surprised if there isn’t all manner of hollering over these taxes by corporates, industry bodies and the Left. Therefore, Chidambaram will probably roll them back. If he does that, Budget 2005-06 will be truly a great achievement. Till then it is regrettably blemished.


Published: Business world, March 2005


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