Taxing The Citizen

Indian legislation has rarely been known for its simplicity or transparency. And, as the CRB Capital scandal showed, when it comes to dealing with matters of personal finance of ordinary citizens, this drawback can become a nightmare. In this article, I have highlighted some of the illogical and ambiguous provisions in various financial laws.

Take the Income Tax Act. Section 80U offers deduction of Rs 40,000 from the income, to a resident individual, who at the end of the previous year, is suffering from a permanent physical disability (including blindness) or is subject to mental retardation, such being a permanent physical disability or mental retardation as specified in this behalf by the Board, which is certified by a physician, a surgeon, an oculist or a psychiatrist, as the case may be, working in a government hospital, and which has the effect of reducing considerably such individuals capacity for normal work or engaging in a gainful employment or occupation...

 

This means that: the individual should be suffering from a permanent disability (such as loss of a limb) only on the last day of the financial year; if he recovers during the next year and does not suffer from the permanent disability on the last day of the year, he would not be eligible; he is welcome to recover during the course of the year but for eligibility, he must once again suffer from permanent disability on the last day of the year; he must get a certificate from medical practitioners who are expected to know the contents of circular no. 246 dated September 20, 1978 which specifies the nature of disability;

Circular no. 375 dated January 2, 1984 declares that the specification of circular no. 246 is only illustrative and there could be other situations or other categories of physical handicaps, such as, deafness, dumbness and mental retardation.

Small investors are the backbone of economic welfare in every country and it is the responsibility of any government to safeguard the savings and interest of these small investors. In India, this task is handled by regulatory bodies like the Reserve Bank of India (RBI), the Securities and Exchange Board of India (Sebi) and others.

Let us take RBIs operations. Way back in June 1995, one of my clients gave me a fixed deposit application form of Mather & Platt. The cap on the interest payable at that time according to RBIs `Acceptance of Deposits Rules was 14 per cent a year. The rules, however, did not specify the periodicity of the payment and a few companies paid 14 divided by 12, i.e., 1.17 per cent a month which worked out to an effective annualised rate of 14.93 per cent. This was the maximum that anyone paid. One could do a little better. Instead of computing the rate on `payable every month it could be calculated on `payable every second! This is exactly what the `Cash Certificate of Reliance Industries did and I appreciated this because it was within the realms of the law.

Mather and Platt found 14 per cent payable monthly (14/12 = 1.17) and compounded annually [{(1.0117^12)-1}*100] equals 14.93. It went through the round once again. It found that 14.93 per cent payable monthly (14.93/12= 1.24) and compounded annually equals 15.94 per cent! It paid interest at this rate. The monthly interest on a deposit of Rs 15,900 was Rs 200. This was bending the law too much. As a matter of fact, as an extension of the same strategy, they could have gone through the cycle one more time (why not twice?) and offered a much higher effective rate. I drew RBIs attention to this but never received a reply.

On rare occasions, however, RBI can rise to occasion. Recently, I had received a letter from one of my readers pointing out that Timesbank was offering 22.67 per cent rate of interest, far better than the public company bonds for whom I had been singing a song. He accused me of being stupidly ignorant. When I inspected the advertisement, I found that somewhere at the bottom after its address, in small print, Timesbank had indicated that this is the compounded interest for a 66-month deposit. No one could fault the bank for misguiding the public. No court of law will ever accept any plea claiming that a depositor was misled by this advertisement.

On November 1, 1996, I requested S P Talwar, RBI deputy governor for corrective action in the interest of the general public. I received a letter dated, February 2, 1997 from his office saying he has advised commercial banks to indicate the simple rate of interest per annum for the period of the deposit in their advertisements and literature soliciting deposits. There are, fortunately, a few responsible officials in the public sector.

Now, let us turn to Sebi. It has been insisting on registration of all the brokers and sub-brokers. I am given to understand that the fee is so stiff that many continue to operate without registration with no difficulty. On the other hand, those who are registered are held on such a tight leash that they get strangulated. Over 75 per cent of their prime time is used to track the regulatory requirements. Consequently, their business suffers. This has a ripple effect on the market. All Sebi regulations put together do not appear to have improved the situation. We have as many defaulters, as many bad deliveries, as many losses in transit, if not more, as in the past. The brokers are held responsible for bad deliveries and those characters who habitually indulge in putting wrong signatures on their shares, forging signatures for stolen shares and distributing counterfeit shares are allowed to go scot free.

About three years ago, a friend of mine complained to CBI at Tanna House regarding fake shares, allegedly printed by a sub-broker, R Kumar. My friend was looking forward to CBI moving swiftly. The CBI sent the complaint to CID at Crawford Market, who forwarded it to the Mahim police station. Finally, a sub-inspector took a statement from my friend. That was the end of the story.

CRB is only a precursor of many more scandals. The various companies that are in greenfield and teakwood projects or chit funds, which are beyond the reach of any regulatory body, find that they can collect thousands from investors through high-pitched publicity. Unless corrective action is taken against them in a hurry, it is easy to predict that we are moving towards a mega-CRB. We will have a good look at such companies in this column next week.