The Hindu Business Line : What was the intent of some Budget moves?

THE Budget seems strong both on intent and content. Many initiatives such as reduction of corporate and individual net effective tax rates, consolidating investment schemes, gold mutual funds are worthy moves. But there are a few things that defy understanding.

The logic and the mechanics of the 0.1 per cent tax on cash withdrawals to begin with. According to the Finance Minister, Mr P. Chidambaram, "these leave no trail and presumably become part of black economy''. If the funds are withdrawn from a bank, do the banks not have a trail? Can the government not make do with these? In any case, how does a tax on these enhance the trail?

It is also difficult to conceive that this tax will be a financial deterrent. For a person putting through a transaction of Rs 10,00,000, a tax of Rs 1,000 will be less than even his taxi hire charges.

Those who will get caught under the net will be the corporates and banks withdrawing huge amounts of cash from the Reserve Bank of India's and the State Bank of India's currency chests! In fact, the tax may unwittingly end up enhancing evasion by people who do not want to pay this new tax instead of being a deterrent. Even the transactions which they were otherwise putting through the regular banking channel will start going without a trace.

The rationale for aligning the individual's maximum rates with the corporate rates is not quite understandable, even if reducing the corporate rate by itself may be meritorious. An individual (not deriving income from business) does not get offsets for expenditure — his total income is taxed whereas for corporates only the net profit is taxed.

An individual does not get some of the privileges enjoyed by corporates. For example, if there is a default by an individual or partnership, the tax authorities will attach even their personal assets; in the case of companies they do not and cannot go after the directors' personal assets. Incidence of taxes by nature falls more heavily on those who can afford it more than on those who can less afford it. Today's corporates have taxable income many times bigger than the richest individual. Equating these entities seems irrational.

Third, the provision for accepting collateral rather than cash as margin for derivatives. One does not understand why this matter should be the subject matter of the Budget. It should be left, if at all, to the Securities and Exchange Board of India.

Moreover, it should be remembered that one of the main reasons for the insurance giant Lloyds of London having a torrid time in the 1980s and the 1990s was the relaxation in the condition that the underwriters (called `names') maintain their margin money in liquid cash. When bank guarantees were accepted, people pledged their houses and other assets to the bank, raised bank guarantees more than their value and, thus, underwrote businesses, which were far beyond their capacity.

Banks do not insist on full collateral for issuing guarantees. Hence, it is possible to get guarantees more times the value of the asset and give these as collateral to the exchanges. Because of this multi-stage leveraging, it is possible to put up more `margins' than if cash was strictly insisted upon. This will increase speculation.

If other collateral were taken, say, real-estate, any upheaval in the derivatives market will necessitate liquidation of these and, thus, immediately transmit into tremors in the other asset markets. In a panic situation, it would be ideal to deal with one fire rather than what burns at many ends — a situation that the current Budget provision seems to be courting.

Fourth, the exemption for service tax up to Rs 4 lakh. Most of the services such as doctors, architects, accountants, lawyers, designers, consultants, have very high margins, the main component of value-addition being personal time spent.

For a gross service income of Rs 4 lakh, it may not be difficult to find net margins of Rs 3 lakh. When one tries to unearth new assesses by prescribing various ridiculous criteria which brings into the ``filing net'' people with net incomes much less, fixing an exemption limit of Rs 4 lakh seems irrational.

When services contribute 50-55 per cent of GDP but a single digit contribution in terms of tax collected, the Finance Minister should have gone flat out and taxed ``all other services not elsewhere specified'' at even a low rate of 2-4 per cent a la the erstwhile Sec 67 of Excise Act. It would have both generated revenue and a wealth of information for meaningful extension of the service tax net.

The Budget seems to pin too much hope on textiles which are comparatively more machine-intensive, and too little on bio-tech and pharma which are highly manpower-intensive. Figures of 1.2 crore employment generation in textiles are in the realms of fantasy. (If the existing ratios such as capital per employee, sales or exports per employee are applied to 1.2 crore employee number, one will get absurd figures.)

Lastly, that Mr Chidambaram has chosen to do nothing about ``perilously close to the limits of fiscal prudence'' situation is disturbing.

Tailpiece: Mapin, Oltas, PAN, TIN... Going by the time it takes to get your Mapin, it looks like a good employment generator.

Finance Ministers should mandate at least one such identification card in each Budget. It will serve to keep a lot of people employed and, thus, at least partially fulfil the Common Minimum Programme objective.

(The author works for Atul Ltd. The views are personal. He can be reached at swaksha_ad1@sancharnet.in)

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