Cleaning up

If he chooses to respond to what industry has been demanding, Finance Minister P Chidambaram will probably tweak some taxes in the Budget. It must be hoped, for instance, that he will remove legitimate business expenses from the ambit of the fringe benefit tax, as he had promised a year ago. Similarly, if he’s keen to restore the balance between mutual funds (which can declare dividends without paying tax) and banks which are desperately trying to raise deposits to match their credit growth, he will bring back the old Section 80L, which provided tax relief on bank deposits—and level the field with mutual funds. Also, now that the Prime Minister’s office has weighed in with the suggestion that the cash withdrawal tax be withdrawn, there will be the general expectation that the finance minister will oblige in some way.

Budgets are about big policy changes, but in the field of taxation the issue now is cleaning up where anomalies exist, and making minor changes on the margin where warranted. Other than that, stability should be the watchword. Among the big issues, the finance minister should be trying to reduce the number of indirect tax rates that apply, getting rid of reverse tariff discrimination, and opening up markets further. But the Budget is also about detail. For instance, banks and financial institutions are trying to sell their non-performing assets (NPAs) to asset reconstruction companies, but there is as yet no clarity on how these NPAs are to be treated for tax purposes - will the increase in the value of these be calculated each year or only in the year the NPA is sold, and how is the purchase value to be indexed each year for purposes of calculating the capital gains? In the case of large infrastructure projects, similarly, large companies get together to form a special purpose vehicle to execute a project, but if the project makes a loss, do the parent companies get to book their share of this when they dissolve the SPV? In a period when companies are into mergers and acquisitions at a much faster pace than before, owners have to pay capital gains taxes when their shares are bought in off-market deals, as is increasingly the practice—if the transaction had taken place through the stock exchange, however, the securities transaction tax (STT) would have been paid on this and there would have been no capital gains tax. This, in fact, is also the reason why a large number of open offers and share buybacks fail—since they are also off-market transactions, no STT is paid on them and so a capital gains tax has to be paid.

There are several such examples, The point is that the tax authorities have not thought of ways to ensure that policy is in keeping with the needs of an industry that is in the growth phase. The policy of not giving credit for the underlying tax paid in foreign countries by Indian ventures there, for instance, ensures that no Indian company likes to bring back its earnings from overseas investments. While this may not have made much of a difference at a time when Indian companies did not invest overseas, it is surely more important today