Sunil Jain: Stealth bombers

RATIONAL EXPECTATIONS

Stealth appears to be the key to how the UPA government functions. So, despite the missive on the impact of foreign retail on the small kirana shops in the country written by Congress President Sonia Gandhi to Prime Minister Manmohan Singh, everyone in the government knows that it was never to be taken seriously. Why else do you think the commerce ministry shot off the kind of reply it did saying there was little evidence that large retailers caused smaller ones to close down. The fact is that the government opened up retail to foreigners in a very deliberate manner, and key functionaries of the government have admitted as much in private""it allowed foreign investment in the back-end or the cash-and-carry segment, and then let foreign retailers appoint Indians as franchisees for the front-end, making the Wal-Mart entry into the country very very legal. The ultimate in the sophistry, of course, is the government appointing ICRIER to do an impact study when the same organisation did a similar study (though it wasn't particularly thorough) just last year!

The same kind of stealth finds its way in the Union Budget, though in this case, the idea's not to usher in changes (like organised retail) that will probably prove beneficial to the economy in the long run. The idea in the Budget is more to increase the power of the taxman and to tax more services without publicising this too much.

A good example is what's happened on the Settlement Commission, a body set up by Yashwant Sinha when he was finance minister. Since the companies against which tax notices were issued tended to litigate them forever and the government's record in securing convictions was very poor, the Settlement Commission was meant to encourage companies to make a clean breast of things and pay the duty evaded once the taxman issued a notice to them, in return for an amnesty from criminal/civil prosecution and, often, from paying a huge penalty.

This was amended last year, and the result was that, if companies confessed to the taxman during the process of investigation, he had the power to settle the case. While this reduced the role of the Settlement Commission, on the face of things it didn't really matter since the net impact was the same"" the companies paid the taxman his due. But what really happened was that if companies didn't confess to the taxman, he didn't release other funds pending (most exporters, for instance, always have huge duty drawback claims that the taxman needs to release)""that is, it became a tool for forcing companies to pay up more taxes. The best example of such arm twisting, of course, is the retrospective change in the law made once the government lost the excise evasion case made out against ITC.

In this year's Budget, the Settlement Commision's powers have been whittled down even further. It no longer has the power to grant immunity from prosecution from any act other than the excise/Customs one, nor does it have the powers to waive payment of interest. In other words, the Settlement Commission has been completely neutered. All this is in the Budget's fine print, and in a letter from the Tax Research Unit to the chief commissioners/commissioners of excise and customs.

It is another letter from the Tax Research Unit, on service tax this time, that makes the position clear on service tax on commercial property put out on rent. The explanatory memorandum along with the Budget suggests that it is brokerage on such property that is to be taxed, or it is the utilities like air-conditioning that are sought to be taxed""most builders break up the rentals into charges for air-conditioning and other utilities like water and electricity. The letter from the Tax Research Unit, however, makes it clear that it is the renting that is the taxable service.

It was an innocuous clarification like this, similarly, that broadened the scope of commission agents a few years ago. In the 2003 Budget, the finance minister had brought commission agents into the service tax net, but all circulars and clarifications said this referred to those involved in helping sell or buy property. In 2005, however, the explanation to the Finance Act said that it was clarifying that a commission agent was one who provided various types of business auxiliary services""this was hardly a clarification, but was a brand new definition and included, for instance, foreign firms that IT/ITeS firms hired to help get business for them. It may be valid to tax such services, but surely it could have been done openly and right up front?