What should not be done in this budget

EXPERT EYE

Suggestions are flying thick and fast about various things that should be done in the Budget. Here I am emphasising the things that should not be done.

The first is that the small-scale exemption should not be tampered with. Several economists have pointed out that the exemption should be minimised. This would not be a very economically justifiable proposition. It should be remembered that the small-scale sector's contribution to job-creation is enormous. Even its contribution to exports is substantial.

In 1989-90, the number of those employed in the small-scale sector was 11.96 million, which increased to 29.49 million in 2005-06. In 1989-90, exports from small-scale industries were $4.58 billion, which increased to $21.25 billion in 2003-04. It is well-established that the growth of export of labour-intensive goods has slowed down in recent years, bringing their share in the total merchandise export down. The obvious implication is that our policy should encourage small firms. So this is not the time to prune the small-scale exemption.

Secondly, the suggestion from an expert group on service taxation and the Kelkar Task Force that all services should be declared taxable should not be implemented.

If all of a sudden, all services are declared taxable, with a few services in the negative or exempted list, there will be chaos as officers will start collecting tax for a large number of services which may not be service at all. It should not be forgotten that the Kelkar Task Force had recommended that even military¸ judicial and administrative services should be given exemptions and be put in the negative list.

The truth is nothing can be exempted if it is not taxable. So by implication, the task force regarded military, administrative and judicial services as taxable. The question of these being taxable does not arise because these are sovereign functions of the state.

Moreover, unless there is an invoice, there is no question of charging a tax. So if such misunderstanding can exist at the highest level of thinking, nobody can blame inspectors for going and collecting tax on services which are not services at all. Many services such as financial services still remain critically controversial. Moreover, some services will yield so little revenue that it is not worthwhile to waste time on them. So it is better to continue with the selective approach than a theoretical one.

Thirdly, there is also a suggestion that in the proposed good and services tax (GST), the power to levy service tax should also be given to states. This is precisely what should not be done.

Firstly, the suggestion that it should be done in the Budget is flowed. The Constitution does not permit states to levy service tax. What the Constitution does not allow cannot be allowed by the Budget. The Constitution cannot be changed in the Budget. Even otherwise, it is not a good policy to allow states to levy service tax. It will have very adverse repercussions as states and the Centre will levy the service tax on the same item. States might levy different rates and they will almost certainly not allow inter-state credit of service taxes collected with the VAT.

Finally, this Budget should not allow the unholy trinity of taxes -- the fringe benefit tax, the securities transaction tax and the cash withdrawal tax -- to continue.

smukher2000@yahoo.com