Spotlight on tax reforms

Centre ought to take cue from Delhi and Mumbai

Two state Budgets — one presented on Tuesday by the Delhi government and the other, a day later, by the Maharashtra government — have turned the spotlight on fiscal reforms in a manner that has many lessons for policy makers at the Centre. Among the many measures the government of Shiela Dikshit unveiled, the move to impose an additional tax on diesel-run cars sold in the Capital deserves special attention. It is a steep levy raising the registration tax burden on diesel-run passenger cars by 25 per cent. The inspiration for this levy has undoubtedly come from the recommendations made more than a year ago by an official committee, headed by former Planning Commission Member, Kirit Parikh. The committee had suggested that diesel-run cars should pay a special one-time tax to the exchequer since the fuel they use is heavily subsidised by the Union government. The Union government had accepted the report’s findings, but fell short of implementing all its recommendations. It decontrolled petrol prices, but retained the subsidised price regime for diesel and other products like kerosene and liquefied petroleum gas.

That the Delhi government showed courage to tread where the Centre fears to go deserves unqualified approbation. Diesel vehicle manufacturers will resent the move but Delhi is the country’s biggest market for diesel-run cars and the move will go a long way in reducing the distortions that subsidised pricing of diesel has created. The Union finance ministry should take the cue and move to gradually eliminate price preferences for diesel.

The Maharashtra government’s Budget, on the other hand, rationalised the stamp duty regime for equity transactions. Consequently, the burden of stamp duty arising out of equity trading in the cash and derivate segments doubled. The net revenue gain following the stamp duty rationalisation is not much, but the move has given rise to a new set of problems since the stamp duty rates for similar transactions in other states, particularly in Delhi and Gujarat, are much lower. The stock-broking community has already begun exploring the options of routing its trades through offices located in other states, where the stamp duty rates are more attractive.

Traditionally, the stamp duty is an area of taxation that has remained in the domain of the states. There is no fear of diversion of business to other states when two neighbouring states have different stamp duty rates for transactions in non-moveable items such as real estate. However, this is not true of equity transactions because technology and the nature of the business allow them to gravitate towards states where the stamp duty costs are lower. The total revenue stamp duty on equity transactions is a tiny portion of the total revenue of Maharashtra, which still accounts for the largest equity trading business in the country. There is, therefore, merit in the argument that stamp duty rates for financial instruments such as stocks should be uniform across the country, protecting investors and brokers from complications arising out of the current taxation system. This may well boost stock trading volumes on the bourses and the states may even earn more revenue.