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Three bad ideas

Business Standard  |  New Delhi 

People in charge of two challenges: correctly identifying a problem, then finding the right solution. The second is more difficult than the first. That perhaps explains why has so often managed to introduce a new but controversial tax that defies economic logic""the banking cash transaction tax is one that, fortunately, seems to be on its way out. The latest to join the list are the fringe benefit tax on ESOPs (employee stock option plans), service tax on commercial rent, and dual tax rate for cement. The first two are based on the sovereign right to define something as taxable and then proceeding to tax it""never mind the test of reasonableness because the right to tax is absolute. The second is the assumption of the right to define what constitutes a "fair" price. This time it concerns cement; the next time it could be a haircut.
On ESOPs, the finance minister's basic position is that ESOPs are a fringe benefit and therefore they should be taxed. But in some other post-Budget comments, he has signalled that he realises there is a problem. In an interview, he said that people should wait till the rules are framed before passing judgement, and that double-taxation should be avoided. In another comment, he is quoted as having said that it is to be decided whether the tax is to be paid by the company or the employee. It is obvious that the tax should be paid by whoever enjoys the benefit of additional income or capital gain, which is the employee. Therefore, the fringe benefit tax is the wrong tool to apply""its original logic, remember, was that it would apply to business expenditure where the associated benefit to an employee cannot be ascertained. The correct tool to apply would be the capital gains tax, except that this has been abolished for shares held for more than a year. Perhaps the finance minister should retrace the step he took on this in 2005, for that would automatically solve the problem.
The finance minister's advisor, P Shome, says "Property rentals...are essentially services in nature and therefore have been brought into (the) service tax net." This can certainly be questioned, for the rent is more in the way of return on an asset""like interest on a bank deposit. It should be, and is, taxed in the hands of the recipient as income; there is no service element here, other than any associated services like property maintenance or air-conditioning. If renting property is a service, then lending money too is a service and banks should be asked to charge service tax on all borrowed funds! It may also be relevant here that, under the Constitution, taxes on immovable property are the preserve of the states. Is that principle being violated here?
The finance minister has chosen to defend the dual tax on cement by saying that it is not a new idea, it already exists for footwear, and also that "Government owes responsibility to the people of India to moderate prices where prices seem to have risen unreasonably. Whether they have risen unreasonably could be discussed. But if they have risen unreasonably, surely the government has (an) obligation to moderate prices." Perhaps, but who is to decide reasonableness? And what is the correct way to address the issue? Why not let the forces of demand and supply work themselves out? If prices are too high and manufacturers are making a fat profit, new capacity will come in and the problem gets resolved. If any kind of price control is encouraged or enforced, new capacity will not come in and the problem will persist, if not get worse. Also, Mr Chidambaram has already had to deal with the complications flowing from cigarette companies and others claiming post-manufacturing expenses, to get around the limits of the printed retail price. Is he now inviting similar complications in cement?


First Published: Wed, March 07 2007. 00:00 IST