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When Dreams Die Young Omkar Goswami
Consider this. Your second production was a super-hit in 1997-98; you return after a long hiatus in July 2004 to cobble a hasty third production — only to tell everyone that it is a quick-and-dirty job, and that they should wait for your fourth shot at the cherry; you whet the audience’s appetite by hinting that the second dream cometh; everyone waits for the appointed hour; and as the clock ticks, you realise that you have to deliver the goodies yet again…
It is tough to be a dream merchant, especially if you are the Finance Minister of a government that has to fund an impossibly large laundry list of expenditure through a perennially deficit exchequer. I believe that’s what happened to Mr. P. Chidambaram. He wanted to deliver dreams yet again; while doing so, realised that he would fall very short on revenue; so his babus quickly fashioned a few nightmares with the hope that they would get lost in the big picture. And for a while they did. Everyone who heard the budget speech immediately gave Chidambaram a ranking varying from a low of 7 out of 10 to a high of 9.5. I had given him 8.
A few hours after, as one pored through the Finance Bill, the little tucked-away monsters came tumbling out. As they did and protests grew louder, we first heard how these good things were successfully introduced in Brazil; then told how there may be the odd drafting errors; and finally informed that while there would be some changes, we must not expect a full rollback.
The Brazil explanation is specious. Brazil also has the Carnival; depending on your preferences, most of the gorgeous women and the bronzed men on those floats are to die for; but try introducing the Carnival in the streets of the Delhi, and you will see what I mean. A bad tax can’t be a good tax just because the poor sods of Rio, Sao Paolo, Lima or Ouagadougou have to pay it.
To the gnomes of North Block, the four most desirable aspects of any tax are: (i) Does it confer huge discretionary powers on the taxmen? (ii) Can the rules be changed every now and then? (iii) Does it inflict greater record-keeping and compliance costs? (iv) Will it collect more revenue? On all these counts, the Banking Cash Transaction Tax (BCTT) and the Fringe Benefit Tax (FBT) are brilliant levies.
Apparently to create audit trails and uncover black money, the BCTT charges a tax of 0.1 per cent tax on every cash withdrawal or cash purchase of bank drafts exceeding Rs.10,000. Like many, I find don’t believe the black money spiel. However, when this was queried in various post-Budget fora, we were darkly told, “You chaps don’t know what we know”. All I know is that if the government has reasons to believe that Omkar Goswami is a drug baron, it has all the ammunition in its arsenal to get whatever information it needs. You don’t need the BCTT for it.
As far as I am concerned, in its present form, the BCTT is a revenue collecting mechanism. Here’s an estimate. We would all agree that 5 per cent of urban India (165 lakh people) withdraws around Rs.30,000 per month for household needs. It can’t be less — or else India’s auto manufacturers, cell phone sellers and home loan pushers will have been bankrupt. On that score alone, North Block ought to collect Rs.594 crore (165 lakh people times Rs.30 times 12 months). I am told that up to 5 per cent of corporate wages is paid in cash, and that the average petty cash balance of a Rs.500 crore company isn’t small. I would therefore estimate that at the present threshold of Rs.10,000, Mr. Chidambaram would have been looking at no less than Rs.1,200 crore. That’s a pretty neat pile of cash in the coffer.
The Fringe Benefit Tax (FBT) is in an altogether different league. Suppose HDFC decided to have an off-site retreat for 50 of its key employees in Kovalam. A fifth of it’s hotel, airfare and other conveyance costs would be taxed at 30 per cent. Half the cost of maintaining company guest houses, half that of attending conferences and half the expenses towards sales promotion and publicity would be similarly taxed. The FBT list is massive; there is no set-off; and it has to be paid even if the company is a zero-tax entity. As far as I am concerned, the bulk of the FBT constitutes an unjust levy on corporate expenditure, instead of being a sensible, well-designed tax on income. In the weeks ahead, I dearly want to see how valiantly the corporate sector will fight to protect its bona fide interests.
Why, I asked myself, did a sensible man like Mr. Chidambaram levy such taxes? The answer is that it was the cost of the second dream budget. When he rationalised personal income taxes and cut corporate tax to 30 per cent, he must have found a gaping revenue hole — what with the additional expenditure demands of the UPA. Step one: cut depreciation from 25 per cent to 15 per cent. Not enough. Step two: raise the surcharge on corporate tax to 10 per cent. Still short. Step three: fob off Rs.29,003 crore of plan capital expenditure to the states and ask them to raise resources through market borrowings. Still no go. So, the budget team quickly introduced these taxes to garner more revenue. I am pretty sure that both tax proposals came into play in the last ten to twelve days as everyone scrambled to seek extra revenue.
It could have been very different. Everyone expected corporate tax to remain at 35 per cent; and services tax to increase to 12 per cent. Had he done those two, Mr. Chidambaram needn’t have created these two monsters. Next time he might consider remembering a line from Rudyard Kipling’s “If”: “If you can dream — and not make dreams your master.”
Published: The Economic Times, March 2005
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