Budget 2011-12 proposed a service tax on private hospitals that have 25 beds and central air-conditioning. Apparently,registration of a hospital requires central AC,because bio-medical equipment and diagnostic labs require central AC. Individual AC doesnt work. Consequently,this provision may eventually be rolled back. However,what is important is the mindset. And that is one of using tax policy to drive social ends. Unfortunately,it is because of such mindsets that tax reform is always incomplete and exemptions continue,though such arbitrary decisions distort resource allocation. They thrive on perceptions that an item is elitist and must be taxed. The objective of direct taxation is to introduce progressivity,so that the relatively poor can be cross-subsidized,through public provisioning in instances of market failure or direct anti-poverty programmes. However,this is an argument that shouldnt be used for indirect taxation. How does one know what is elitist and what is not? Do public sector hospitals not have central AC? If they do,why discriminate between private sector and public sector? Do poor not use private hospital services? With abdication by the State and increased expenditure on private health services,even by the poor,that is not the case. Have we got something against AC?
Even if we do,is there any reason to differentiate between central AC and non-central AC? Is a 24-bed hospital pro-poor and 26-bed hospital anti-poor? One wouldnt have objected had service sector taxation been uniformly levied,without differentiation. The problem is with these fine distinctions. So if hotel tariff is more than Rs 1000 per day,the hotel is pro-rich. But if the tariff is below this threshold,the hotel is pro-poor. And so on. Drinking is fine (in any event,that is a State subject). But if you drink in a pub or permit room,that is anti-poor. The simple point is this. Increasing indirect taxes often makes an item elitist,because prices go up. Therefore,one shouldnt tinker around with indirect taxation. Direct taxation is more efficient. One had thought that post-1991,the direction of indirect tax reform was clear standardize,make taxation uniform,reduce discretion. That also helps reduce compliance costs. Indeed,this is supposed to be the base for GST,to be introduced from 1 April 2012. However,one is skeptical of that objective,because this budget doesnt standardize (except for customs),it increases discretion. It is almost as if the moral of tax reform hasnt been imbibed.
