Economic Highlights

New Delhi, 24 February 2012

Taxing Expenditure

ABSURD, WON’T RAISE KITTY

By Shivaji Sarkar

The income-tax department is one of a kind. It takes one step forward and two backwards. Its decision to do away with filing of tax returns up to Rs 5 lakh of income is welcome. However, it has come with a retrograde step to tax supposed luxury expenditure by trying to redefine wealth.

The move is extortive and would further stymie growth of a sagging economy. Manufacturing sector, industry, services et al are showing signs of stress and anxiety. The people are not having enough disposable income i.e. spare money. High inflation, interest rates, tax deduction on bank deposits coupled with job losses has robbed the markets of the buyers.

In the midst of preparing the Union Budget, Finance Minister Pranab Mukherjee would need to act to bring that confidence back to the market if he wants revenue income to grow to meet his needs. Taxes should be lubricating the economy instead of putting brakes on it. Sadly, the I-T department is doing exactly this. Taxing expenditure was a favourite issue in socialist economies. India has given that up since 1991. A market driven economy requires buyers and that means people must spend to contribute to the growth.

During the past three years just the reverse is happening. People are spending less, paying more in terms of taxes. If the factor of inflation is included they require at least 25 to 30 per cent relief in their tax payments. This has not happened. If some of the cesses such as education are included they are paying far more taxes.

At such a time the move to tax a purchase of Rs 50,000 for buying a watch or jewellery may appear aimed at the rich but in reality it may send a shiver through all, as there would be a lingering fear that the taxman is watching and thus the visits to the markets must be cut down. More so, as nobody wants to be harassed. At the same time, the I-T department says it would spend more on collecting information through random surveys by enquiries on architects, interior decorators, antique dealers, imported watch dealers and art galleries to collect the requisite information.

Indeed, it is one of the most unwise decisions. The people who are into all these activities pay taxes. With some spare that they have, they indulge in making purchases that help run many businesses. Some of these like interior designing are at a nascent stage. Many shops have specialised in selling imported watches for two reasons: one that India does not specialise in watch making and two that one makes a statement with foreign brands. Likewise, the Indian art market has just started developing. Though we are not an international hub yet it has the potential to develop into one. But such tughlaqi (autocratic) decisions would put all these activities to nought.

Besides, there is a flip side too. The I-T department makes much expenditure, which it should better avoid. The new move would give I-T officers enough teeth to bite where they should not. The big question is: How would the Government ensure that the provisions would not be used for ulterior motives by these tax officials.

In fact, those spending such amounts on these purchases would be less than one per cent of the three per cent of total taxpayers. The move would drain the Finance Ministry on the one hand and provide opportunities to the tax officials to harass people on the other.

The predicament of the Finance Minister is well understood. He has to increase his revenue income. This requires steps that would give him more money and also boost the industrial, manufacturing and other similar activities. Higher such activities the higher would be his income from tax earnings. Increasing production is certainly not the concern of the FM alone. However, his one wrong step can throw a spanner in all genuine efforts.

Clearly, the Finance Minister has to devise a benevolent affordable tax structure. His tax moves should ensure low product prices, higher sales and boost production. However, he is doing just the opposite. Despite introduction of VAT, products are taxed at many points making the ultimate domestically produced goods expensive. This has put many businesses out of steam. This again is a loss not only in terms of tax but also drains the economy as more has to be spent on sick or not so healthy industries.

Hence, the Finance Minister has to take a call on this. He has to reduce rates and simplify procedures. Difficult procedures also have a cost on economy and business operations. It also paves way for competing foreign economies such as China to penetrate the system through offering impractically lower prices for products. This has put many small-scale units such as firecrackers, knife, cutlery and scissors, toys, sports goods, watches, electrical and electronics almost close down their activities. They cannot match the prices that China offers.

The country needs to create tariff barriers on all such imports to create a level-playing field. On the other it has also to ensure incentives for Indian small-scale and other manufacturers so that they are in a position to compete and combat dumping. In fact the World Trade Organisation has provisions to stop dumping and India should take a cue. It also needs to take steps that are increasing cost of production. Various kinds of taxes have made industrial activity difficult. This is not to argue that industries should not pay taxes, but these need to be affordable.  

The recent move to impose Rs 413 crore tax on Board of Cricket Control of India on an assessed income of Rs 964 crore may make some happy, but one must realise that if any activity has to pay almost 50 per cent as taxes, it would be better to close it down rather than run it.

The tax rules have many gaping holes and this causes difficulty and leads to arbitrary tax assessments, consequent litigations and further drain on tax resources. Many appeals lying at I-T tribunals are frivolous. If such files are closed the department would save more money than it can really earn. Hopefully the Direct Tax Code has been further put off. It has to be a simple code than a compendium of rules that are difficult to implement.

Let us keep in mind that Indian business does not pay I-T and excise alone. There are hosts of other taxes at State and local levels. For example, road travel itself is being taxed through tolls and makes goods more expensive.

Finance Minister has to have a thorough look at the entire tax spectrum and not his own kitty alone so that it has rational affordable basis, simple calculations and the tax system gives a boost to domestic activities and checks undercutting by foreign products. It is not just swadeshi but a survival mantra, a system that would, if put in place, increase revenue earnings. Can the FM please consider it? -- INFA

(Copyright, India News and Feature Alliance)