Fringe non-benefit tax

Union Finance Minister P. Chidambaram has trimmed the fringe benefit tax (FBT) in response to the outcry against it from Indian companies. Pharma and IT have been given special concessions. It is unfortunate that he has decided to keep the tax. Even if the amount has been brought down, it means continued interference of the tax administration machinery with the way companies do their accounts and spend. The tax will encourage companies to show their expenses in new and innovative ways. Any tax that distorts the behaviour of companies and which gives powers to tax officials to interfere with companies is a cost to the economy. In this case, the amount of tax is small, and the revenue it will generate will not be large. It is not clear that the cost it imposes on productivity will be outweighed by the benefit to the exchequer.

Moreover, while today it may sound reasonable to give concessions to pharma and IT, the principle of giving concessions to one industry or another gives the state arbitrary powers. It works on the principles that the bureaucrats in the ministry of finance know what is good and what is bad for the economy. This model has been tried before and has failed in India. Moreover, once concessions are given to some industries, it means that they can be given for others, if others can prove their case to the ministry. Tomorrow, it will be the turn of other sectors to lobby for tax concessions. It is unfortunate that the finance minister, who has publicly spoken for simplification and unification of taxes and the removal of the exemption raj, has introduced a retrogressive tax like the fringe benefits tax which goes against the spirit of getting the government progressively out of business. Now the tax authorities can choose to tell companies what will be considered a legitimate expense and what will not. The FM should have junked the FBT and not merely reduced it.

Similarly, while Chidambaram has done away with the cash withdrawal tax on savings accounts — which means that households will no longer have to pay this tax since they operate savings accounts — the tax will continue to be imposed on companies who operate current accounts. The increase in the limit from Rs 10,000 to Rs 25,000 is not good enough for this purpose. It is not correct to tax transactions. Companies will need to withdraw cash for making legitimate payments. It is not clear how this transaction tax will obtain its supposed objective of checking black money. The Banking Transaction Tax, like the Securities Transaction Tax, introduced last year is a distortionary tax. The FM should have junked both.