Let me start this one with a disclaimer. I am not super-rich. I don’t run a business. Nor do I punt on the stock or commodity markets. Therefore, my suggestions on the Budget have nothing to do with my own finances.
It seems necessary to clarify all this because there is something about the Budget which brings out the worst in people.
As the Budget nears, you find industry captains sternly reprimanding the Finance Minister (FM) on the deficit, blithely lobbying for tax or duty cuts for their own units.
Companies which prided themselves on being ‘globally competitive’ suddenly clamour for protection from Chinese imports. And firms which willingly splurge millions on CSR initiatives want the FM to refrain from excise duty hikes on their products.
Budget wish lists this year have been longer than ever, with everyone looking to the FM to supply the magic elixir that will rescue them from the ongoing slowdown.
But with so many demands vying for his attention, we thought we should try and simplify matters. Here are four ideas that he need not consider in this year’s Budget.
Don’t tax the super-taxed
The idea that the millionaire living on Malabar Hill should be made to pay two times the tax rate that you pay is, in theory, an appealing one. But the problem with this is implementation.
It would indeed be good if the Income-Tax Department could systematically identify all those luxury villa/Merc/yacht owners and then knock at their doors, demanding a bigger contribution to the exchequer. But as this cannot be easily done, what is now being proposed by way of taxing the ‘super-rich’ is to impose a 40 per cent tax or a hefty surcharge on income earners in the top tax bracket (over Rs 20 lakh a year).
There are big flaws to this approach. For one, the super-rich in this country may hail from the ranks of business tycoons, politicians, movie stars or lawyers. But they are quite unlikely to be people who work at a day job and dutifully file returns. Plus, statistics from the tax department show that assessees in the Rs 20 lakh-plus bracket already pay a lot of tax. In fact, the 4 lakh people in this category chip in with two-thirds of the country’s income-tax collections. To tax them further seems iniquitous.
Therefore, if the Government is really keen on taxing the super-rich, it must look beyond the sitting ducks — the salaried. The tax net must be cast wider by mandating PAN numbers for more transactions, and better using the tax information network.
Don’t levy transaction tax
One interesting sidelight to this Budget has been the slugfest between the stock and commodity exchanges on the issue of Securities Transaction Tax (STT). The stock exchanges want STT to be extended to commodity trades, on the plea that trading derivatives on commodities is as speculative as doing it on stocks. Commodity exchanges counter that, unlike share trading, commodity trading offers real benefits to the economy by helping farmers and actual users hedge their positions.
In fact, the best thing for the FM to do would be to remove STT altogether. Instead, he must go back to taxing capital gains. The logic for this is simple. STT imposes a levy on turnover, irrespective of whether a trader made profits or losses. It also adds to the cost of every trade. Thus, STT impacts both market participation and liquidity.
But how should the FM make up the shortfall? Well, by taxing the speculative profits that traders make — whether on stocks, commodities or currency. Though the bulk of trades in the securities markets today happen via the futures and options route, tax laws on profits from such trades are far from clear.
For instance, whether trading profits are taxed as business income or speculative gains depends on whether the person declares himself as a trader or an investor. The tax treatment is also different for stock, commodity and currency markets.
There appears to be no need for such distinctions. Why not abolish STT and tax all gains from derivative and non-delivery-based trades at a flat rate? This will also put a quick end to the war of words between the exchanges.
Don’t raise divestment target
When the Government is short of tax revenues and, yet, needs the money to step up public spending, experts offer an expedient solution that won’t hurt them — increase the divestment target.
Now, the notion that the Government should not be in the business of running airlines or making boilers is a sound one.
But this does not mean putting perfectly good assets on the block in bad markets, offering them at throwaway prices and then disposing them off in rapid-fire fashion, just so that the year-end divestment ‘target’ is met.
Any newbie accountant will tell you that selling off capital assets to shore up the annual profit is far from a prudent practice. Why not substitute the annual divestment targets with profit or dividend targets for PSUs, so that the inflows are sustainable?
The divestment programme can then be put through at leisure, when it attracts quality bidders at good prices.
Don’t make exceptions
For all the criticisms levelled against the tax department, it has made laudable progress in some areas of revenue collection, thanks to Budgets in recent years.
The proposal to tax services, and not just goods, has brought many new entities into the tax net.
A systematic effort to identify ‘revenue foregone’ has helped eliminate the many loopholes and exemptions that cluttered up the tax structure. It has also made for more equitable taxes.
Having achieved all this, it is essential for the FM to stick to his guns this year and not give in to niggling demands from various sections of industry for special concessions.
A slowdown may be on, but it is a cyclical one. Exempting one sector from service tax, another from Minimum Alternate Tax and a few others from excise duty is not going to make much difference to the fundamental problems of sluggish spending and low investments that are clogging up the economy.
If India Inc wants the FM to put the economy back on track, let it do some belt tightening of its own.