The Hindu Business Line : A largesse for deep-pockets

ONE has heard of tax holiday to specific industries. But not tax holiday for industrialists. That precisely is what Mr. P. Chidambaram's Budget 2004 has given in its avowed over zealousness to humour the capital market. First, in 1997, he spared the industrialists, capitalists and sundry moneybags from tax liability as far as dividend was concerned. Now it is celebrations time for them. For, they have now been completely let off insofar as tax liability on rewards from investments in shares are concerned. Oh yes, the twin moves have benefited the garden-variety investors as well. But that is only incidental.

Consider Azim Premji, the promoter of Wipro. He reportedly owns directly or indirectly 75 per cent or more of its equity. He does not have to pay any tax on dividend that the company declares from time to time because dividend is not taxable in the hands of the shareholders but the company distributing it is liable to a 12.5 per cent distribution tax. If anything therefore Azim Premji gets away with just a slap on his wrist — a vicarious tax of 12.5 per cent on the dividend income. And if he chooses to collect the reward from the market, he would be better off still inasmuch as from the AY 2005-2006 there would not be any tax on long-term securities sold in the stock exchange. What it boils down to is this: If an investor is prepared to bide his time and wait for a year before he liquidates his holdings which is no big deal, he would be left severely alone by the taxman.

Going by the Supreme Court verdict in the oft-quoted CIT vs H. Holck Larsen (1986 160 ITR 67), all promoters make the grade as investor thus being eligible for jumping into the capital gains bandwagon.

The Tatas, Birlas, Ambanis and other `who is who' of the Indian industrial scene would also benefit by Mr Chidambaram's unwarranted munificence. And this does not portend well. A tax regime which lets off those who are well heeled goes against the cardinal principle of taxation — tax according to ability. The Finance Minister's concomitant move to usher in the securities transactions tax (STT) would leave them (the investors) with minor bruises, if at all. Alas, the Finance Minister in his overarching desire to give a fillip to the equity cult has introduced inequity among the taxpayers.

It is ironical that men with deep pockets are left off the tax hook even as lesser mortals, read the salaried class, are burdened with more and more in one form or the other. Foreign institutional investors (FIIs) with deeper pockets are also beneficiaries of this indulgent regime. The news doing the rounds is that sweeping concessions to earners of capital gains was announced in this Budget with a view to obviating the need for them (FIIs) to route their investments in India via Mauritius. Given the fact that FIIs are the new movers and shakers of the capital market, the loss of revenue on account of this mindless indulgence would be considerable.

What incidentally are the comrades doing about this largesse to the capital market? It seems the enormity of the concession to company promoters has not dawned on them. Their ire is only against loosening of limits for FDI in sensitive sectors and lowering of interest rates on small savings. Should not they be concerned about the invidious inequity implicit in the tax regime, which bends backwards to humour the moneybags, especially given the fact that tax concessions do not bring investors into the market in droves — it is the prospect of earning capital appreciation that does. That Section 54ED which seeks to channelise one's investments in the secondary market into the primary market has elicited but a lukewarm response amply proves this point.

(The author is a Delhi-based chartered accountant.)

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