T C A Srinivasa-Raghavan: Vintage Chidambaram

OKONOMOS

In 1988, when he was a minister of state of home, P Chidambaram brought in the defamation bill. Such a bill was needed, but not in the way he did it.

In 1997, he brought in the Minimum Alternate Tax, of which the same can be said. Ditto for the Securities Transaction Tax last year.

And now comes the Fringe Benefits Tax (FBT). As with the other things, the idea is all right but the execution is pure Chidambaram "" unsound because it is so imperious.

A FBT is not such a bizarre idea. Some other countries, notably Australia and New Zealand, have it. Even the universities pay it. But it is designed properly and is applicable to all employees, and not just a subset of them.

So the real question in India, where the government is the largest employer and offers all manner of fringe benefits, the question must be asked: Will the FBT apply to government and public sector employees as well? And if not, why not?

The question is worth pondering because the clearest definition of the tax states that it is "a tax on benefits that employees receive as a result of their employment, including those benefits provided through someone other than an employer." (https://bsmedia.business-standard.comwww.ird.govt.nz/fbt/overview/)

This definition has two parts. One is the benefit that employees receive as a result of their employment; the other is "benefits provided through someone other than the employer."

In India, both are pervasive. For instance, senior officials of the Indian Railways are entitled to treatment at Apollo, even though there are first-class railway hospitals maintained by the railways. Why, the largest category of officers in the Indian Railways is doctors!

Or, secretaries to the government of India are entitled to first-class airfare when travelling abroad on work. On Air India this comes with a free companion ticket. Will this be taxable as coming under the second category, namely, benefit provided by someone else?

Public sector bank employees also get a large number of fringe benefits, starting from brooms to all manner of bills paid by the bank. Will these be taxed? After all, they amount to nearly a third of the employee's salary at every level of employment.

I can, from anecdotal evidence, list many such fringe benefits. All of us can. That is why a full and public list must be placed before the country because the benefits that government and public sector employees enjoy are huge.

They are also completely non-transparent and unknown to the general public. Often, they effectively double salaries. If these benefits are not going to be taxed, someone should file a PIL and ask the Supreme Court what it thinks. It would be a classic case where the ends of both justice and equity are served at the same time.

You may well ask: can the government tax itself? If no, it can certainly tax the public sector because it already does for under other heads.

Two American economists examined fringe benefits and taxes on them back in 1994. They used cross-sectional data for blue and white-collar workers to see how the tax treatment of fringe benefits affected the way in which employers offered benefits.

They found that "that employers respond to tax incentives to offer fringe benefits, especially to blue collar workers. The tax incentives affect both the probability of basic benefits, such as medical coverage, and more 'marginal' benefits, such as vision and dental coverage. Higher taxes also reduce the amount of explicit cost sharing for some benefits between employers and employees."

This, when you think of it, is useful finding for India where the effort should be to pass on as many of such "community" costs to employers, rather then burdening the government with them. Instead, Chidambaram, because he is desperate for revenue for financing politically beneficial projects, has done the opposite.

There is another benefit that India currently leaves untaxed. The only other country that also does not tax this benefit is Pakistan. All, I repeat, all other countries tax these payments.

And what is this benefit? It is the untaxed dollar pension from the World Bank, IMF, ADB and so on (the second part of the definition above). Chidambaram should tell us who the beneficiaries of these pensions are.

Or, if I may take the liberty of ending this article with a Tamil couplet:

Summa, Saar justu. (Idle mind; so like that wonly I am asking)

(Taxes and Fringe Benefits Offered by Employers, NBER Working Paper 4764, June 1994)