Try discussion papers

The two notable points about the finance minister's reply to the debate on the Budget are, first, that the buoyant revenue performance has been confirmed; and second, that Mr Chidambaram has responded to the widespread criticism of some of his taxation proposals and modified them. The cement industry will heave a sigh of relief that the impractical idea of using a dual tax policy to try and force cement prices down has been given up in all but name, though the dual tax structure remains. While the finance minister's responsiveness to criticism is to be welcomed, it is clear that this is borne out of his failure to convince cement manufacturers and not out of any recognition that the idea was not a good one in the first place. Indeed, it is hard to figure out what purpose the new tax rates serve, as they will have no significant bearing on cement prices from the viewpoint of battling inflation. It would be better to give up the dual tax idea altogether, but that will have to wait for another day.

Mr Chidambaram has also modified significantly his proposal to impose the fringe benefit tax on employee stock options, to ease the danger of a company having to accept an open-ended liability depending on its stock price in the future. Here, unlike with cement, the minister has seen logic in the criticism, and he has tried to address some of the specific problems that had been pointed out in the debate following the presentation of the Budget. However, the logical flaw at the core of the idea of taxing Esops as a fringe benefit remains; such a benefit was defined at the time of its introduction as that portion of a company's expenditure that qualified as a benefit to an employee but which could not be directly ascribed to an employee and taxed in his or her hands (like the personal benefit from entertaining company clients at a restaurant, or of staying in a luxury hotel while on company work). An Esop does not qualify as a fringe benefit that is defined in this manner, and logically any tax imposed on this account should be paid by the employee and not by the company.

The substantive issue arising from the experience with the last two Union Budgets is that the logical and other defects in new ideas on taxation are not detected when they are debated only within government circles before being presented to Parliament. No one should cavil at the finance minister seeking out new sources of revenue and new methods for increasing tax income; that is the inevitable concomitant of a rapidly evolving economy. However, novel ideas should be properly debated and tested in discussions with tax experts, before being adopted. The correct way of doing this has been demonstrated by some of the industry regulatory bodies that have come into existence in recent years; they routinely issue discussion papers in order to test specific ideas. Adoption of a new idea or proposal then follows widespread debate, and thereby reduces the risk of having to roll back or modify a proposed measure (as has happened with so many tax innovations proposed in recent years). There is no reason why the finance minister should not adopt a similar approach; if he has novel taxation ideas, they should be placed before Parliament in the winter session, and incorporated into Budget proposals only after the ideas have been thoroughly debated and have gained acceptance. Such a method will also not violate parliamentary privilege, as both the original idea as well as the final proposal will be presented first to the Lok Sabha.