A K Bhattacharya: A taxing finance minister

RAISINA HILL

Finance Minister Palaniappan Chidambaram has described his 2005-06 Budget as a watershed "" a Budget that is a clean break from the past. He may have his reasons for why his second Budget as finance minister of the United Progressive Alliance (UPA) government has set a new trend.

But there are several other reasons for which Chidambaram's Budget will be remembered for a long time to come. Let us take a close look at the key objectives of his direct tax initiatives as outlined in the Finance Bill, 2005.

The FM proposed that he would streamline tax administration to reduce transaction costs and facilitate voluntary compliance. Tax experts, however, point out that two of the finance minister's new taxes have actually increased transaction costs for companies.

The proposed fringe benefits tax envisages that all companies will have to file a quarterly return on the taxable fringe benefits being offered to their employees. There will be separate assessment of these returns.

In effect, companies will find that they have to increase their engagement with the tax department. Voluntary compliance may or may not increase. But the companies' transaction costs will certainly go up as a result of the fringe benefits tax.

Banks will face a similar problem. The cash withdrawal tax means that banks will have to maintain a separate record of every withdrawal of over Rs 10,000, deduct the tax and then deposit this with the government.

For those ATMs which have the facility of withdrawing more than Rs 10,000 in cash, the software may have to be changed so that the tax is deducted for any withdrawal above the specified amount and necessary records sent to the tax department. This may be a cumbersome procedure.

Banks are now wondering whether sharing of all bank transactions with the tax department would have been a better idea than the cash withdrawal tax. It is well known that because the banks had shown reluctance to share such information on the grounds of banking secrecy that the finance ministry had thought of the novel idea of the cash withdrawal tax.

There is yet another discordant note in the Finance Bill. One of the objectives of direct tax changes is to lower the burden on the income tax payer significantly. In his speech, Chidambaram went a step further.

"Honourable members will be happy to note that tax payers in every tax bracket will gain from my proposal," he said. But as any senior citizens (above 65 years of age) will tell you, his entire gain is conditional to investing in some savings instruments, without which the person will end up paying more taxes.

This is because the tax rebate (about Rs 20,000) under Section 88-B, which he used to enjoy, is now proposed to be taken away.

The 2005-06 Budget will also be remembered for the manner in which the finance minister deliberately avoided making announcements of big ticket reforms like he, along with his predecessors, did for several years.

In fact, these announcements became a joke, because many of these promises were never implemented. Yashwant Sinha had announced in 2000 his plan to privatise Indian Airlines.

A couple of years later, Sinha announced labour market reforms. Nothing came of either of these proposals.

Chidambaram was himself aware of the difficulties he faced in implementing the decisions he announced in his 2004 Budget on increasing the foreign direct investment (FDI) limits in the civil aviation and telecommunication sectors.

It is a fact that he is yet to get the FDI limit for the insurance sector raised inspite of including this in his 2004 Budget speech. So this year, he bid goodbye to all those grand reformist announcements.

Yes, there was a reference to FDI in his Budget speech but all that he said was: I believe that there are (FDI) opportunities in other sectors as well, such as mining, trade and pensions. The government will, after due consultation, come forward with suitable proposals".

This may be due to the Left's influence on the UPA government. But even otherwise, Chidambaram has stayed away from making grand announcements in this Budget. The message is clear. The Budget should be seen primarily as an annual financial statement of the government.

For reforms, people should look forward to changes in policies round the year. In his own words, the finance ministry is not a one-day wonder that everything should be expected to happen through the Budget.

Thus, Chidambaram's second Budget as the finance minister in the UPA government would be remembered for the two taxes he cleverly introduced. In four Budgets, he has introduced four new taxes "" the earlier two being the minimum alternate tax in 1996 and the securities transaction tax in 2004. And that is quite a record for any finance minister.