ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Budget 2007-08:An Eventful Non-Event

The union budget for 2007-08 continues with ill-conceived tax measures and there remains no action, despite knowledge of the problem, to counter the undesirable effects of bad governance and incompetent management.


Budget 2007-08: An Eventful Non-Event


Economic and Political WeeklyMarch 24, 2007997stronger than provided by government.Hopefully, some research institutionswould undertake such an exercise in publicinterest.Service tax:Though less controversial thanFBT, the service tax suffers from seriousshortcomings. No rational basis exists forits selective levy and unjustified discrimi-nation. For instance, there is no logicalreason why services provided by doctorsand lawyers remain outside the purviewof this tax. Further, unlike in the case ofexcisable goods, it is very difficult to claimdisallowance for (revenue) expenses incur-red for providing a service and (capital)costs for acquisition of marketable skills.A neat segregation between “personal”and “business” expenses is almost impos-sible, especially for individual serviceproviders working out of their homes.The horror stories of excise inspectorshandling commercial entities are suffi-ciently intimidating for even honest indi-viduals to attempt to pursue their claims.More difficult are claims for “investments”.Acquisition of skills is an expensive propo-sition and the gestation period for suchservices is quite long. Constant investmentin upgradation is required for providinghigh quality services. There is no simplestructured mechanism, akin to deprecia-tion, for amortisation of investment madein acquiring skills. Unless, therefore, theservice tax is passed on to the user ofservices, the combined incidence of in-come and service tax turns out to be higherthan rate of service tax because of aninadequate netting of expenses.Banking cash transaction tax: Another“innovative”tax is the banking cash trans-action tax, which is ostensibly levied toscare off evaders. The budget estimate for2007-08 provides for collection of a rela-tively modest amount of Rs 645 crore. Thispurpose can be easily subserved by insist-ing that cash transaction beyond a certainvalue must require PAN!Other tinkering: Other notable examplesof tinkering in tax rates are the increaseand dual excise duty on cement. Theincreaseof 2.5 per cent to 15 per cent individend distribution tax “having regardto capacity to pay” is, to say the least, ill-timed. In my judgment the growth incorporate profits and hence in distribut-able profits should decelerate in 2007-08thereby impacting revenues. The impair-ment of revenues would be compoundedby several companies declaring interimdividends to escape an increase in distri-bution tax. Not only is dual excise dutyon cement a meaningless tinkering ofrates,the entire drama of the price increaseand its rollback under pressure is an un-seemly example of the penchant forinterference,which could impair investorconfidence.It is true that the finance minister isdealing with a difficult situation of infla-tion. But ill-conceived tinkering that canachieve little but do a lot of damage toinvestor confidence is not the answer.Perhaps what is driving such short-sightedinterventions is the belief, often publiclyuttered by Chidambaram, that the govern-ment’s economic policy cannot ignorepolitical compulsions. As the followingbrief discussion of public expenditureshows, this is a misguided belief becausethere is not as great a divergence betweengood politics and good economics.12.5 x 3

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