Drop them

In three days' time, the finance minister, P Chidambaram, will move amendments to the Finance Bill. Among the many things taxpayers will look forward to are his decisions with regard to the two new taxes he proposed: the tax on fringe benefits and the bizarre tax on cash withdrawals. Both met with cries of dismay.

Although industry decided that discretion was the better part of valour and accepted the logic of an FBT, the citizenry at large has not been so accommodating in respect of the cash withdrawal tax. It simply can't understand the logic.

Industry's viewpoint has doubtless been shaped by the fact that the finance minister has a valid point. If companies choose to pay a part of the salary to employees in ways that enhance their income by saving them expenditure, it makes sense for the minister to claim his pound of flesh on this opaque income.

The logic is simple: whatever amounts to income must be taxed. That said, two caveats must be entered. One, the tax must be properly designed (which it has not been in Round 1) and it must be administered fairly. Even if it is assumed that the best and the brightest of the finance ministry and the CBDT will come up with a dazzlingly perfect plan, only the naïve would believe that it will be administered fairly.

The sorry truth is that income tax officials are capable of serious harassment, and the finance minister should pay attention to the fear that the new tax will increase corruption. Until the proposed reform of tax administration has made demonstrable progress, the FBT should be scrapped.

The purpose of disfavouring cash withdrawals should be to remove the bias in favour of cash transactions. The bias is the result, not of the absence of a tax, but of the failure to charge for using cash while charging for using cheques and credit cards. Banks and service providers levy user fees on these services but not cash services.

Indeed, the government itself refuses to accept anything except cash in many instances. What this means is that the cost allocation between using cheques and credit cards, on the one hand, and cash, on the other, needs to be rectified. But this is a subject to be considered for the future in a different idea framework. For the present, the finance minister should simply drop an ill-considered tax, or make the qualifying amount so large as to achieve the same end result.