Cess, surcharge, transaction tax distortionary: Virmani

Press Trust Of India / New Delhi July 6, 2009, 0:51 IST

Justifying the Economic Survey’s prescription of phasing out varieties of cess, surcharges and transaction taxes like fringe benefit tax (FBT) and securities transaction tax (STT), the principal author of the pre-Budget document, Arvind Virmani, today said these levies are “distortionary” and impede tax simplification.

“In my knowledge of tax theory, transaction taxes are distortionary...Again, tax theory says that earmarked cesses are generally not a good idea ... And that goes for surcharges also,” Virmani, who is also Chief Economic Advisor (CEA), told PTI in an interview.

The survey has prescribed phasing out surcharges, cess on taxes and transaction taxes like FBT, STT and the proposed commodities transaction tax (CTT).

“A transaction tax means those transactions will go down. And, the presumption is if they are just normal transactions, that’s not a good thing,” the CEA said.

On cess, Virmani said that as a general rule, earmarking, which is a budget practice of dedicating a general tax to a programme, is not something that tax theorists like because it takes away from budgetary discipline.

He added the suggestions made in the survey are meant to be achieved in the medium term, over the next five years.

The issue here is of simplifying the tax system and earning more revenue, he said.

“We want a simple system because that will give more revenue on a sustained basis. So, again it’s a long-term issue. On a long-term basis, it is better to have a neutral, simple tax system which will give revenue,” Virmani said.

When asked how certain schemes like education can be funded if the cess goes, he said in the short term there can be all kinds of constraints, but revenue will increase in the long run by simplifying the tax structure.

“A neutral tax is something which doesn’t distort decisions. That is why you move from a commodity tax to a value-added tax. A value-added tax does not distort what people buy or don’t buy,” Virmani said.

Surcharge at 10 per cent is levied on those earning at least Rs 10 lakh per annum and corporate tax. Industry wants the surcharge to go to make calculating corporate tax simple and increase the disposable income of people.

Education cess is levied at 3 per cent on income tax. Besides, a cess of Rs 2 per litre is levied on petrol and diesel to fund building national highways, rural development and laying state roads.

As regard STT, investors pay 0.125 per cent for every transaction in cash for the delivery of shares. Transactions in derivatives attract a lower STT of around 0.017 per cent.

FBT, which was introduced in the 2005-06 Budget, is on disguised perquisites. It is levied on employers.