The first reaction of most (including myself) to the Budget presented by the finance minister, Mr Chidambaram, on February 28 was that it was a very sensible Budget, and one fit for the times.
However, on reading the fine print (actually boldly stated in the Finance Bill, but with only a hint in the Speech) it appeared that there was more to the tax and spend proposals than reform of personal income taxes and feigned concern about 'outcomes.'
The problem with the Budget is that it has been made by both Dr Jekyll and Mr Hyde. There is sense, and then there is the nonsense of a tax on cash transactions (CTT) and a tax on "fringe benefits" (FBT).
The split personality of the Budget can best be understood by a parallel and simultaneous development in our UPA-led democracy. The finance minister had barely finished speaking when news came that the UPA government was following the dictum of the "end justifying the means" (we are nice guys and would never violate the basic tents of democracy--after all, we are the "radical chic"). The local government in Jharkhand went to the sore loser, also co-incidentally a member of the Ruling alliance.
While the political arm of the government was playing footsie with the devil, the Prime Minister, Dr Manmohan Singh, let it be known that he preferred practising democracy the old-fashioned way -- i.e. by playing by the rules.
It is unclear whether democracy will eventually win in Jharkhand--what is clear is that the tarnished image of the Congress (they brought you the Emergency, the anti-Sikh riots) is even more stained. What is intriguing is that no one has a clue as to what the Congress could possibly have gained by its arrogant, amateurish (mis)adventures.
Analogously, it is not at all clear what the government hopes to gain by the announcement of the cash transactions tax (CTT) or the fringe benefits tax. The ostensible reason behind the CTT was to track black money--if Mr Chidambaram said it once, he said it a thousand times: this is not a revenue-raising measure, it is meant to track black money.
Surely then you should be tracking cash deposits, not withdrawals; and surely then you should be tracking very large deposits, not Rs 10,000 withdrawals. And in any case, why do you need a tax to notify the all-powerful government (which owns all the major banks) about cash withdrawals?
Maybe, just maybe, it was a revenue-raising measure, after all. The FM let the cat out of the bag by defending the CTT because it had been tried in Brazil! What he did not mention was the fact that in Brazil the tax is meant to raise money and is on cheque transactions!
There have been two major personal income tax reforms in India (1997-98 and 2005-06) and Mr Chidambaram should be justifiably proud of the vision, the boldness, and design of these reforms.
By clubbing all investments in one category, and eliminating most exemptions, the new personal income tax system is designed to ensure fairness, compliance, and lack of harassment (read corruption) on the part of income tax officers.
Last year, he eliminated the tax on long-term capital gains and reduced the short-term capital gains tax to the internationally competitive level of 10 per cent. By this policy (along with a small tax on transactions on securities), the FM went against most of the received wisdom among traditional and morality brigade economists who were opposed to these give-aways to the "rich".
The erstwhile extraordinarily high 30 per cent tax on short-term capital gains was a boon to brokers and officers in the income tax department. They made money via illegal tax-loss selling (which every tax officer knew) while the government lost a few thousand crores.
Today, the government has an extra Rs 3,000-4,000 crore (Rs 30-40 billion) because of Chidambaram's policy initiative.
But while the moral brigade may have lost last year, it has retaliated with a vengeance today: it has proposed the transactions and the fringe benefit taxes in order to "tax the rich ***s"!
It is not the case that the FBT is without merit. If properly designed, and properly implemented, the tax is sensible. Just as the Employment Guarantee Scheme is sensible if But the way it has been framed, the FBT will benefit mainly the tax officers.
The framing makes Stalin proud. There is a precise and variable tax on expenditures that run the gamut from the genuine fringe benefit to a benefit that only Mr Hyde can imagine.
Firm expenditures for private travel are a genuine fringe benefit; but attendance at a conference, involvement in sales promotion, and attendance at a Diwali party that some may not have wanted to attend in the first place do not constitute income for the individual.
The genuine fringe benefits are very few and can be counted on one hand. In contrast, the mandarins in North Block have listed one FB for each letter of the alphabet. There is a larger question raised by the FBT and one that can, and should, backfire on trigger-happy bureaucrats.
We all agree that perks should be taxed, and indeed in his defence of the FBT, the FM stated: "I have looked into the present system of taxing perquisites and I have found that many perquisites are disguised as fringe benefits, and escape tax. Neither the employer nor the employee pays any tax on these benefits which are certainly of considerable material value."
Perks of even more considerable value are enjoyed by government officials and members of Parliament. Practically free housing, telephones, travel, etc. and several sources of income are at each government employee's command. In most civilised societies, tax laws and tax liabilities are not a function of the colour of one's skin, or the sex of the employer.
Why is government employment different from any other employment? And why is the government not taxing the bribes received by the politicians (Jharkhand again) and by its own officials? Is that not income--why, it might even be black income, which the FM government is so keen to unearth.
The fringe benefits for government servants are large, and unfair. They distort the labour market and the marriage market, and institutionalise corruption. The Jekyll part of the FM needs to be commended for highlighting this issue. Let an honest debate begin, and let the matter go to the Supreme Court.
Fringe benefits should be taxed--starting with your neighbourhood MLA, minister, politician, and babu. I am happy to provide whatever input, expertise, etc. is required to any lawyer who wants my services -- free of charge. And I won't even ask for a fringe benefit.
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