:: Nitish Sengupta

Taxing issues will occupy Pranab

Nitish Sengupta

June.4 : We must salute the Indian people who have given a decisive "yes" in favour of a stable government for the next five years. We can now look forward to India’s steady march to prosperity under a strengthened and rejuvenated United Progressive Alliance (UPA) leadership.

One important fallout of the political changes in Delhi is the return of Pranab Mukherjee to the finance ministry after about a quarter-of-a-century. He was the finance minister in Indira Gandhi’s Cabinet and was rated as one of the best five finance ministers of the world for the year 1984, according to a survey of Euro Money, a journal published from New York. However, we should remember that the last time Mr Mukherjee served as finance minister, he was operating in a regulatory environment. He will now have to operate in a de-regulated environment, although there is no doubt that Mr Mukherjee did initiate some liberalising policy measures.

The biggest task facing Mr Mukherjee right now is next Budget. While tax revenue has been buoyant, reforms in the tax structure still need to be done. Tax rates have steadily reduced since 1980s and India is today one of the least taxed countries in the world. However, the plethora of exemptions, which existed in our tax laws when the rates were very high, still remain. These deserve serious attention. While it may not be necessary to further reduce tax rates, except perhaps raising the tax exemption limit marginally, most exemptions need to be removed to make our tax administration simpler and to do away with the unholy alliance of tax officials and chartered accountants.

It is a pity that former finance minister P. Chidambaram could not introduce the direct-tax code in spite of his efforts. There has been tremendous upsurge in tax revenue during the UPA regime, but tax reforms are long overdue. India’s tax laws have become increasingly complex, making it difficult for taxpayers to pay correct taxes and file returns on their own. Mr Chidambaram’s tenure as finance minister will be remembered for several unviable taxes that he introduced — the fringe benefit tax (FBT), the securities transaction tax (STT) and the banking cash transaction tax (BCTT) which was later withdrawn. All these taxes are counter-productive and substantially inflate the cost of doing business in India.

FBT has been an object of criticism from the very beginning. Employers who provide houses to employees were taxed. But strangely, houses provided to officials by the government are not treated as a fringe benefit, thereby giving rise to a clear case of discrimination in favour of government employees. All expenses paid by a company for sending officers on training programmes are also taxed, although there is no rational justification for this. A survey conducted by the Federation of Indian Chambers of Commerce and Industry (Ficci) and PricewaterhouseCoopers found that in some well-known companies the effective incidence of tax rate became as high as 87.5 per cent, bringing it close to the absurd level of taxation that prevailed in the1970s. FBT collection, incidentally, has risen by over 15 per cent to Rs 627 crores in a year.

The UPA’s first Budget introduced STT and its incidence was further hiked the next year. Inevitably, a lot of incremental business of Indian Stock Exchange, in trying to avoid this tax, migrated to tax-friendlier places like Singapore and Dubai.

Mr Chidambaram did not do anything noticeable to remove the large number of exemptions still present in our tax laws.

Traditionally, Indian tax rates have been among the highest in the world, but there were enough exemptions with which it was possible to bring down the tax liability substantially. There was a feeling that dramatic lowering of taxation rates would be accompanied by the removal of many of these exemptions. Alas, Mr Chidambaram did precious little.

Another issue that deserves serious consideration is to gradually replace income tax by a tax on expenditure — a suggestion made as early as the 1950s by Nicholas Kaldor, a leading Cambridge economist, whom Pt. Jawaharlal Nehru invited to take a look at our tax system. Unfortunately, Kaldor’s suggestions have just gathered dust all these years. Income tax is a matter of speculation and can be manipulated by both the assessee and the assessor. Evasion is endless. Expenditure is transparent, and so is the tax on it. A case in point is the service tax introduced by the first UPA government. We should aim at having an expenditure tax system which gradually replaces income tax. This will minimise corruption, evasion and high-handedness by tax authorities.

Apart from taxation, A push to disinvestment in the public sector is called for even if majority ownership for the government is retained, thereby not exposing the government to the charge of privatisation about which even some constituents of the UPA have reservations.

The stock market has greeted the new government with a smart rally. It appears to remember that it was the revival of forward trading in shares, after Mr Mukherjee lifted the ban on it in 1984, which started the share market boom that continued for two decades. The new government must take advantage of the ongoing rally to make sure that every profitable Public Sector Enterprise (PSE) has its shares quoted so that people can judge its true worth.

But while reducing government holding in companies through Initial Public Offerings (IPO) or sale of shares to strategic partners in the secondary market, care should be taken not to reduce government holding below 50 per cent in profit-making companies. The right given earlier to the purchaser to demand the sale of the balance, as in the cases of Maruti, Videsh Sanchar Nigam Limited (VSNL) and Bharat Aluminium, should be scrapped. As a result of this clause, government completely exited from these profitable companies. This was truly like selling family silver. Taking into account the present state of the stock market, the government can raise huge sums from sale of shares or from IPO which it can use to spend on the priority sectors.

Nitish Sengupta, an academic and an author, is a former Member of Parliament and a former secretary to the Government of India