This money stinks

OFF THE RECORD

History is witness to all kinds of strange taxes, in an attempt to generate revenue. Peter the Great imposed a tax on beards, plus another tax on souls. William Pitt the Younger introduced a tax on windows. Emperor Vespasian imposed a tax on urine, not urinating, since the tax was on urine used for commercial purposes by wool and leather industries. The urine tax is often incorrectly ascribed to Nero. When Vespasian's son Titus objected to this smelly tax, Vespasian waved a coin under his nose and asked him if it smelt. Since it did not, we have the quote "pecunia non olet" or "money doesn't smell". Taxes may also serve a disincentive function, to curb provisioning of public "bads", such as the Tennessee litigation tax. Indian citizens would probably like such a litigation tax. But that's unlikely to be introduced, since 65 per cent of civil cases (not criminal cases) involve the government. In these columns, Shankar Acharya has christened 2005-06 as the year of bad taxes. I will add to the list of three bad taxes Shankar mentioned. However, note that if 2005-06 is the year of bad taxes, 2006-07 is likely to be the year of bad expenditure (courtesy the National Rural Employment Guarantee and Bharat Nirman).

Nor should one forget the now-announced Sixth Pay Commission, with a possible impact in 2006-07 or 2007-08, depending on when elections are contemplated. With the resultant confiscatory taxation, which the PM apparently is against, we are looking at 2007-08 as the year of bad growth. Rather paradoxically, Vespasian introduced his urine tax against the framework of a tax reform experiment. Our present confiscatory and irrational taxes are also set against the backdrop of a tax reform direction articulated in a series of recommendations, Vijay Kelkar's three reports being the latest. Ever since the days of Magna Carta in 1215 and down to the Boston Tea Party in 1773, there has been a principle of no taxation without representation and its implied converse, no representation without taxation.

Yet, at Pravasi Bharatiya Divas and similar other gatherings, NRIs and PIOs (Persons of Indian Origin) lobby for voting rights in India. And it now seems that the present government will agree, at least for NRIs and PIOs in West Asia. In the constituency-driven electoral structure we have, a resident cannot vote in a constituency other than the one in which he/she resides. Section 16 of the Representation of the People Act actually prevents non-resident citizens from voting. But in this digitised and globalised world, we will allow them representation and exhibit preferential non-national treatment.

If non-residents are granted representation, they must be subjected to taxation. And following national treatment now, we must subject not only Indian citizens, but also foreigners to taxation. There are indeed legal principles. For example, the income-earner must be taxed. But we have already flouted this in the FBT. Yet another legal principle is that you tax only when income is earned in India, not otherwise. Taxation shouldn't have extra-territorial jurisdiction. However, this was flouted through a change in the Service Tax Rules on June 16, 2005. Even if a taxable service is received and consumed outside India, a service tax now has to be paid, unless there is a specific exemption. Those exemptions are through what may be called a positive list, such as individuals or specific types of agents. If you are not in this positive list, and happen to be above the threshold, you must now register yourself as a service recipient and pay tax at 10.2 per cent. By the way, this extra-territorial jurisdiction doesn't extend to Jammu & Kashmir, for obvious reasons. But it extends to the rest of the world. What else will we think of when we salivate at the prospect of greater tax revenue?

BS had better be careful with columnists from abroad. We economists have often been told we complain about the FBT because we don't understand law. Having not understood the law, it seems to me this provision applies equally well to BS and television channels. Shankar made the point that his three identified bad taxes (the FBT, securities transaction tax, cash withdrawal tax) flout economic rationale and the logic of tax reforms since 1991. I think this fourth bad tax may not be as important quantitatively, but is worse on economic rationale. Going back to the issue of taxation and representation, the government's tax proposals are subjected to parliamentary scrutiny. Since this fourth tax was introduced through a change in the Service Tax Rules (Rule 2(1)(d)(iv) on June 16, 2005, and wasn't explicitly or implicitly part of the Finance Bill, I wonder whether Parliament knows what has been done. If not, given greater expenditure and resource generation pressures, one should exercise greater vigil in 2006-07. The devil isn't in the detail, the devil is the detail. We are not only knocking back FRBM targets, we are distorting the logic of tax reform and a stable tax policy, making life more difficult and increasing compliance costs. This money may not smell literally, but it stinks metaphorically. And I don't think even Vespasian would have liked it.