Not enough

The finance minister has done enough by way of amending his two controversial tax proposals to blunt criticism, but not enough to end it altogether""especially on the fringe benefit tax (or FBT).

The cash withdrawal tax in its revised form, after excluding all savings bank accounts and specifying a threshold that excludes everyday transactions, is no more the irritant that its original variant was and Mr Chidambaram has been as good as his word on this account.

However, it remains to be seen whether he will achieve his stated objective of tracking undeclared money any better than the already existing declaration of permanent account numbers for specified transactions.

While he is about it, the finance minister would in fact do well to check how the PAN information is being used, if it is being used at all to catch tax evaders.

As for the fringe benefit tax, it is clear that the finance minister is not willing (or able) to give up the revenue that he had assumed from its imposition. So while he has eased its rigours in some ways (notably by excluding advertising), he has increased the FBT burden on other kinds of expenditures (notably telephone bills""which, let it be noted, already attract a service tax).

In the process, he has kept the FBT "revenue neutral" but not corrected the faulty logic implicit in the way the scope of the FBT is defined. In March, following the wave of protest that met the announcement of its introduction, Mr Chidambaram had said that he had not noted the precise wording of the section and it was not his intention to tax normal business transactions; all he wanted to do was catch companies that were avoiding tax through the innovative use of perquisites rules.

The principle is sound, and has been accepted in many countries. But the logic that has been applied remains such that genuine business costs that are in no way fringe benefits for employees will continue to be taxed. In that important sense, Mr Chidambaram has reneged on a promise that he made repeatedly two months ago.

This should be clear enough from the decision to continue to tax all business travel, all telephone costs other than leased lines, and so on. The finance minister defended his action by saying that the effective tax rate on companies was much lower than the nominal rate, and that the FBT would raise the effective rate by only 1-1.5 percentage points.

That is as it may be, and except for specific companies whose nature of business puts them squarely in the firing line, the substance of the complaint is not that the tax is a heavy burden. Someone with Mr Chidambaram's intelligence cannot have missed this obvious point, so it must be read as a deliberate decision to focus on the revenue target and ignore the logical flaw as well as the promise made.

The one point which the finance minister should re-consider, even at this late stage, is the taxation of superannuation benefits. India lacks a social security system; and the figures show that the provident fund mechanism is not serving the purpose of giving employees a retirement nest egg.

Yet PF contributions get favourable tax treatment and more, whereas superannuation benefits are now sought to be fully taxed. The contradiction is too glaring to be ignored, especially when the government does not impute a tax on the pension benefits that get built up during the career span of its own employees.