The Hindu Business Line : In the Budget's aftermath

THE end of February is a lovely time to be in in almost any part of India. The rains are a distant memory, the blazing heat is months away yet, and the Himalayan cold spell starts losing its bite to early spring breezes. And along comes, like clockwork, the Union Budget on the last day of the month. To many in businesses that do not have the lobbying muscle, it seems a spoilsport, and to householders already grappling with the widening ends of their own budget, every tax or levy only exacerbates difficulties already being felt.

Marketing managers in particular dread the moment in the Budget speech when changes to the excise and customs duty regime are announced. Prices may go up, making sales tougher; or they may have to be instantly reduced, which means the prospect of dealing with claims from the trade of losses due to drop in profitability or selling below their earlier purchase price. It is always a headache trying to estimate and haggle over how much is to be rebated or compensated by the manufacturer to the trade and how much is to be left as his normal trading risk. After all, when prices go up, the stock profits do accrue to the trade, never mind what they actually claim.

These days the Budget's impact on the consumer is of a different kind. The era of continuously increasing taxation has ended. It has been replaced by one of steadily falling import and excise duties on nearly all industrial inputs, besides reductions in effective rates of personal income tax over the decade. Added to this is the huge rise in credit card usage, and at rapidly falling interest rates. So all in all the tax-paying salaried middle class has had more money in the pocket than before - and, of course, a far larger and tempting variety of consumer goods and appliances to spend it on.

Oddly enough, this has only made the marketer's job more of an uphill struggle. Variety implies increasing demand for novelty, therefore the pressure to bring in a succession of new models, if not newer technologies, which is the case with everything from mobile phones to motorcycles, cars and TV sets. Few markets are exceptions to this. As change becomes faster, there is less of a cycle time to recover all the set-up costs of building a new brand name or model. After a break of a few years the pressures on the media-cost side too are once again building up. Inflation is estimated at about 8-10 per cent.

It is against this background that one must consider the inclusion of a phrase innocuously slipped in under the new fringe benefits tax on "sales promotion and publicity." Not merely that, the taxman's axe was supposed to fall on much else that is the everyday life of the marketing manager - air travel, cars, sales conferences, tours, hotel bills, guest house accommodation, meals taken with outsiders as normal entertainment! To make matters worse, in an interview given to a TV channel, the Joint Secretary tried to defend the indefensible, saying that only a certain proportion of each of these sometimes widely unconnected elements of "fringe benefits enjoyed by the employees" even if not individually would be taken as a basis for taxation. So 50 per cent of this and 20 per cent that and 30 per cent of the other would all be added in a fruit salad of apples and oranges and a number arrived at - of which 30 per cent would amount to the tax payable by the employer.

If the blanket allowance on savings of up to Rs 1 lakh was a way to reduce work for chartered accountants, as the Minister jokingly observed, here was his obvious way of making it up to them. What is `fringe' and what is beyond the fringe in a benefit could keep the traditional Indian mind engaged in mental gymnastics and superb hair-splitting for years.

It brought back to me the hectic days of the late '70s when the new Janata government, fresh from the victory over the forces of repression and so on, imposed its own measures to curtail what it saw as conspicuous consumption, the most controversial one of which was the disallowance (fancy word for tax) of 20 per cent of the advertising and sales promotion expenditure incurred by a company.

Everyone in society who was somebody was affected in some way, including political parties who are no strangers to publicity. Media owners, employees, printing presses, screen printers, wall sign writers, and journalists (who normally turn up their noses at the business side of things as something best suffered in silence and ignored) were up in arms. Not to mention the big guns of the client world, who were also large business houses, some foreign, but in the prevailing mood of the day, the Finance Minister HM Patel held his ground. Impassioned petitions pleading the case of all the constituencies fell on deaf years. Of course, the tax was eventually withdrawn after a suitable interval, but not during that year. The damage, however, was done to some, including a leading advertising agency with which I was connected, whose billings dropped 25 per cent inside a year, and, of course, meant job losses in many places. It taught me the futility of drastic policy measures to tackle vague and over-ambitious goals, which require for their achievement nothing short of a metamorphosis in the standards of ethics and morality of the business community.

A similar case is that of the currently debated cash withdrawal tax. The issue is not whether ten rupees is a lot of money, as the Finance Minister too agrees. It is nobody's case that credit cards and a cheque system should not be actively encouraged. Nor is there any disagreement about the goals of unearthing (or `tracking' to use the FM's favourite word) black money. The real question is whether on balance the ordinary taxpayer's and the bank's discomfort is worthwhile (not to mention more book-keeping and form filling); and whether, after all of that, the black economy will shrink away in fear.

Many politicians have bemoaned the growth of the parallel economy and tried many ways to curb it. A generally liberal economic regime, with lower income taxes and free trade practices without too many permits and licences, was supposed to reduce the incidence of untaxed, illegal income. But it is equally well known that much of such ill-gotten wealth that escapes the tax net ends up in funds to pay for the expensive conduct of elections, the proud symbol of our very freedom and democracy. B. K. Nehru has gone into great depth on this whole issue, The Roots of Corruption in a masterly GL Mehta Memorial lecture delivered in Madras in the early '80s.

All in all, these two attempts at tax reform have already perhaps caused more consternation than they are worth. What is even more of interest was given only a brief and polite mention, namely, the actual implementation across the country of a uniform value added tax. The real opposition to that is also from those upset about being "tracked." And their propensity to create the necessary tax-free funds for various unsavoury activities will be curtailed. What is more, every sale will leave a trail that could be caught in the net of governmental statistics, something the average tax-dodger's mind would boggle at. How one wishes the Finance Minister and his colleagues would act on these people, and not focus on the section of the public more easily traceable any way. Otherwise they would be searching for the needle, like Sufi mullah Naseeruddin, not where it is likely to be but where the light is!

(The author is a student and observer of markets, people and organisations.)

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