The Telegraph
Since 1st March, 1999
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- Fortunately, Chidambaram is riding the crest of the virtuous cycle

An exercised journalist asked P. Chidambaram at his post-budget press conference whether he would have to pay 12 per cent service tax on all the cash he withdrew from an automatic teller machine. The finance minister was amused; he said the tax would be on the service provided by the ATM, and not on the cash ' although he left a bit vague how that service would be valued.

Another incredulous journalist asked how he expected to bring down fiscal deficit to an incredible 3.8 per cent of GDP next year. Chidambaram replied that revenue had risen at 20 per cent a year for the past three years; if it continued to rise at that rate, he had enough room to provide for desired expenditure and bring down the deficit-to-GDP ratio. He talked of the virtuous cycle of growth and investment. Virtuous it may be, but it is a cycle, and he is lucky he is riding its crest. It is in the nature of the cycle that at other times, growth and revenue will slump, and another finance minister at another time will find it difficult to control his deficit.

Chidambaram is also lucky in two other respects. Indian interest rates have come down dramatically in the past five years; the Central government paid 10.2 per cent on average on its borrowings in 2000-01, and 8.1 per cent in 2005-06. So the government increased its debt burden by 68 per cent, but its interest payments rose only 38 per cent. That bounty continues to bless Chidambaram. It will not continue, for reserve accumulation has ended and interest rates have started rising. The government has done nothing to reverse this; but it can enjoy the windfall while it lasts.

And between 2000-01 and 2005-06, the states, by a combination of luck and self-discipline, raised their revenue from 11.3 to 12.2 per cent and reduced their fiscal deficit from 4.2 to 3.1 per cent of GDP. They have been so flush that they have been parking their money in the Central government's treasury bills. They will soon get another gift from the finance commission, which will raise their share of Central revenue from 29 to 29.5 per cent. So state governments are no longer the mendicants they have been for decades; the prime minister no longer has to carry a 10-billion-rupee note in his pocket for baksheesh whenever he goes to a state ruled by the Congress, and the finance minister does not have to have rescue packages ready for profligate states such as West Bengal.

So altogether, Chidambaram was less stressed this year. Last year he imposed two disastrous taxes ' the fringe benefit tax and the cash withdrawal tax. If a finance minister needs money, it is not a great idea to impose new taxes. New taxes mean new administration, new rules and new resistance; they invariably fetch little in initial years. But Chidambaram felt pressed to raise revenue, and this was his way of doing it. This year he did not have to indulge in such follies. He could have abandoned earlier follies; but that is not his way. He made a couple of trivial changes in FBT and said that he had talked to chambers of commerce and they told him they would be satisfied with such sops. He scoffed at businesses' complaints that FBT imposed transaction costs on them; he said, how could they have incurred any transaction costs when the tax return is not due till October' He might have considered the possibility that they began to put systems in place to calculate the tax before the last moment it became due. Instead of treating objections to FBT as debating points, he should have seriously asked himself whether he could achieve his objective with fewer hassles. One option had been put to him ' abolish FBT and add another half per cent to corporation tax. Another is to disallow expenses that currently attract FBT when calculating corporation tax. I myself consider FBT fundamentally wrong because it discriminates against one form of corporate expenditure without any reason. If you tax unattributable personnel expenses, then why not tax wages and salaries' And on what grounds should either be taxed'

Chidambaram cited the example of some firm in Chandni Chowk in Delhi which had been buying demand drafts from firms and 'laundering money', and which was caught by CWT. Just how it is illegal to buy demand drafts, and just why imposition of FBT was necessary for monitoring cash withdrawals, Chidambaram did not explain. He promised to reconsider the tax once something called annual information returns was in place. He did not say when that would be.

But Chidambaram did make an important fiscal announcement ' that he wanted to plan for introduction of a general sales tax by 2010. That is beyond the next general election, so he does not have to worry about it; but it is a worthy objective nevertheless. He even put down a small deposit on the plan: he raised service tax to 12 per cent, presumably as a step towards a central GST of 12 or 16 per cent. The Centre has had a value added tax of sorts since the Eighties; in other words, it gives business taxpayers rebate for tax paid by their vendors on inputs when calculating their excise liability. Yashwant Sinha started persuading states to move from their sales taxes to a VAT in 2000. Finally, all the states except five states ruled by non-UPA parties adopted a VAT of sorts last year. But both the VATs are a pale shadow of a real VAT.

Ideally, there should be a single rate of tax, part of which would go to the Centre and part to the states; there should be a single tax administration and a single treasury in which the tax is to be paid. What we have are two separate taxes collected by the Centre and the states with different tax administrations and many different tax rates. Businesses cannot set off Central VAT on inputs when paying the state VAT, or vice versa. These moth-eaten VATs are no advance on the old excises and sales taxes going back to the 19th century. Chidambaram means that they should be converted into a proper, unified VAT by 2010. It is ambitious, but ambition in a right cause is always to be commended. During this year, however, let us see action in this direction, even if it is only a committee to be chaired by the finance minister of West Bengal.

I have deliberately omitted all comment on the expenditure proposals of the budget. For I believe that the government's monitoring of its expenditure is so poor that the money achieves little of the government's objectives and ends up mostly in the pockets of the undeserving and the powerful. A look at the last outcome budget did nothing to correct my impression. This government has two honest men, Manmohan Singh and Chidambaram, in command. I continue to hope that they will put in place a machinery to convince the middle class that its taxes are being used for a deserving cause.

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