Budget 2016: Arun Jaitley takes the Chidambaram route to taxing the same thing again and again

New Delhi: Finance Minister Arun Jaitley’s federal Budget for the fiscal year 2016-17, has done well in propelling investment in the right places and maintaining the guidance on the fiscal deficit. The Budget displays a strong Narendra Modi touch but wherever the PM’s hand is missing, it is much of the same, with incremental tinkering rather than making bold departures from the UPA budgetary template.

Many of the finance ministry’s tax proposals betray an entrenched mindset steeped in an unsavoury and complex cocktail of communist and socialist philosophies. This reflects in how tax proposals are collected. Markets would have appreciated a single tax, even at a higher rate, rather than sneaking in multiple small taxes to mask the real tax burden.

P Chidambaram and Arun Jaitley. Image: PIB

P Chidambaram and Arun Jaitley. Image: PIB

For example, Service Tax at 15% versus a slab of 14% + 0.5% + 0.5% is about collecting the same tax, but with maximum distress (because the rules for all the three – 14%, 0.5% and the next 0.5% are different). This is a continuation of the UPA’s policies, where P. Chidambaram, former Finance Minister, mastered the concept of multiple cesses and levies and cess on cess - or basically, taxing the same thing again and again and again.

The tax proposals additionally lack the principle of equity and fairness. A capitalist, market-oriented nation rewards meritocracy and hard work, incentivising people to get rich. These budget proposals do just the opposite. Some glaring examples:

1) Another VDIS – The Black Money Act failed to curb black money, by failing to bring politicians and political parties under the tax net. Yet, it is incentivizing the corrupt once again by bringing in another amnesty scheme. The VDIS disincentives people who work hard and pay their taxes while encouraging people to evade taxes. Though the government has not explained the need for another VDIS, it is being viewed as a tacit acceptance of defeat.

2) Abolition of STT - The first hint that the government is toying with the idea of removing exemptions given to dividends in the hands of shareholders and Long Term Capital Gains Tax (LTCG) where STT is already paid, came from Mr. Modi in a public speech in February. This got a universal thumbs down from the market and the stock market sold till the budget day.

It should be remembered that a new Securities Transaction Tax (STT) was introduced by P. Chidambaram, former finance minister, on all stock market transactions to cover FIIs who do not pay capital gains due to Mauritius and similar treaties and the LTCG threshold on shares where STT is paid, was reduced to 1 year from 3 years as partial compensation to domestic shareholders. STT was a blow to the domestic stock market participants which lives in continuing hope that some government in future will remove this special tax on capital markets and bring normalcy.

Since there was vociferous resistance to reducing the LTCG threshold without removing STT, the government has taken a half step by increasing STT on options and lowering the LTCG ceiling for unlisted shares and off market transaction of shares from 3 years to 2 years. However, this has fueled apprehensions that next year, the LTCG ceiling may be increased to 2 years on shares where STT is paid and STT may stay. The markets want the removal of STT for domestic participants and restoration of the earlier tax position but this tinkering of LTCG and STT is another example that the government wants to discourage capital markets, not deepen or broaden it so that it becomes a more effective source of capital mobilization and investment. At the same time, GIFT city in Gujarat is exempt from all such shenanigans. Why should citizens get second hand treatment ?

3) Dividend Tax - Dividends received above Rs 10 lakh from domestic companies (Section 115O) will now be taxed in the hands of shareholders. This is essentially a tax on promoters and large shareholders of firms and discourages entrepreneurship despite the governments’ stated objective of wanting to incentivise startups.

It would have been simpler and more equitable to abolish the Dividend Distribution Tax and let dividends be taxed as any other income, but the government has chosen to retain it.

The interpretation of this move by the market is that the government believes paying of dividends is not desirable. It is also feared that the move could be disguising a hidden, longer term agenda, like bringing down the Rs 10 lakh ceiling or sneaking in a cess on the 10% rate next year, in effect, taxing dividends at a rate higher than other sources of incomes. The Budget fails to explain the logic behind this tax or how it ties up with the principles of fair and equitable taxation.

4) Tax on EPF - Employer contributions to the Employee’s Provident Fund (EPF) were tax exempt so far. This has been brought under the tax net above a certain limit going forward. Employee contributions to EPF were always taxable beyond the 80C exemption limit of Rs 1.5 lakh, which includes other investments like LIC, PPF, etc. Now withdrawals from EPF for contributions made from FY17 onwards will also be taxed with 40% deduction.

This requires salaried employees to maintain separate records of such contributions and income. The headache apart, in a country where there is no social security, this is detrimental to the salaried class by reducing their retirement savings. The government should be asked to explain, through a position paper what its long term fiscal objectives are so that the common man can try to relate to its logic.

5) Exemptions to startups - These exemptions make good headlines. The Registrar of Companies has been directed to register a startup within a day but it may take months to first even get a startup status from the government. The government has announced other concessions pandering to foreign private equity investors while treating local entrepreneurs and businessmen who are not connected to such foreign and private investors unfairly.

6) The government has missed the bus on the most obvious source of saving on expenditure and raising tax revenue – cutting the perquisites given to politicians and civil servants. This would have curbed wasted expenditure. Further, the valuation norms for perquisites given to civil servants and politicians is ridiculously low. In the interest of equity, can the finance ministry explain the rationale behind giving preferential treatment to this class of tax payers?

7) The Budget has also failed to tax rich farmers with agricultural income exceeding Rs 1 crore (or people with farm houses) to mobilise additional tax revenue, which would have signaled the fact that all sources of income are dealt with in an equitable manner.

In summary, the government, now more than ever, considering India’s demographics, needs to incentivize people to work hard and get rich. Instead, this Budget reflects a jaded mindset that screeches: “If you have enough money, you should not mind giving some more (politicians and the like exempted)”.

Updated Date: Mar 01, 2016 15:58 PM

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