Altering Tax Rates To Prop Up Economy

Tough times call for tough measures. One of the greatest advantages of being in a soup is that the means of getting out of it are never questioned. So, too, with the economy. Bushwhacked by an economic ice age that has frozen all economic activity, governments across the world are now adopting methods that were held in great disdain till the other day to thaw the chill. That also gives the government of the day in India some elbow room to try out stuff that they otherwise would have balked at even touching with a barge pole.

Former finance minister P Chidambaram let the cat out of the bag a couple of days ago, when he said that constitutionally there is no bar on the government altering tax rates to stimulate a decelerating economy. The same day in another location, the minister of state for industry Ashwini Kumar told reporters that the government was indeed drawing up a sector-specific stimulus package that would be presented during the “interim” Budget on February 6.

Hence, it does seem that the government might arm itself with some extraordinary economic tools to stir a recalcitrant economy into some sort of movement. Whether these will take the form of tax breaks or not is still too early to say. But, one thing is for sure — these exceptional circumstances warrant exceptional actions. And, the Opposition might be willing to relax its traditional, and probably perennial, hypercritical role in the run-up to the elections. In all the demands made for tax breaks made by industry, including the one submitted by the textiles and the gems and jewellery, there are some other tax issues that might have got obscured in the avalanche of sector-specific demands. There might be some stimulus potential in them, too. Here they are:

• The former finance minister introduced a tax called “fringe benefit tax”, which sought to tax companies offering their employees fringe benefits, or perquisites, in addition to the monetary wages and salaries. In short, “fringe benefit” as defined by the Finance Bill, means any privilege, service, facility or amenity directly or indirectly provided by an employer to his employees (including former employees) by virtue of them being employed. The benefits also include reimbursements, made by the employer, either directly or indirectly to the employees for any purpose, contributions by the employer to an approved superannuation fund as well as any free or concessional tickets provided by the employer for private journeys undertaken by the employees or their family members.

There were many arguments made in favour of the new imposition, especially since it was also in currency in the US, Australia (on which the Indian structure is modelled), the UK, Canada, Japan and some other countries. There were also some arguments made both in favour and against the new levy, citing the constitution as the reference point. However, even if we are to ignore all these arguments for the moment — since they have all been made by learned people — there is only one teeny-weeny case that can be made in favour of scrapping or lowering FBT. And that is this: the tax is actually levied on expenditure at a time when the government is struggling to induce people to spend. Therefore, there seem to be adequate reasons — especially of the “exigent” variety — that warrant a rationalisation, or even a drastic reduction in FBT.

• As part of the two stimulus packages announced a few weeks ago, the government sharply cut excise duty to spur consumption in the economy. This was widely expected and had been demanded by both experts as well as industry lobbies. The impact of these cuts might take some time to play through the various layers of the economy (especially since some of the companies might still be holding old inventory, either in the form of finished goods or raw materials), though the industry analysts seem to think that the auto industry might have benefited from it already. But, there was unanimity that the excise rate cuts were indeed the right thing to do, since the levy is a pass-through and, eventually, it is a tax on consumption.

But, just like excise duty is a tax paid on manufacturing, which finally is borne by the consumer, the government also introduced a tax on services soon after it became well established that services were contributing to almost 50% of the country’s GDP. But, while the government has been reducing excise duties to spur consumption of products, no thought has been given to its equivalent in services. There is a possibility that some cuts in service tax might also help bring about a spurt in consumption.

(Courtesy: The Economic Times)

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