In the usually sad and tragic Hindi movies of yore, often a Johnny Walker or Mehmood appeared anytime the going got too heavy for too long, did a little jig in drag and gave us all some comic relief. Then, back to normal, and handkerchiefs.
This government seems to have taken a leaf out of the same book. At least as far as its economic management is concerned. Reform is blocked in most areas, so is economic legislation (which is the fault of the Opposition as well), the markets are in a mess, ministers are speaking in so many voices that if two happen to say the same thing it spawns a new conspiracy theory in New Delhi, other centres of power, extra-constitutional but accepted by the government, are merrily denouncing even its intent to reform so many sectors of the economy. The only relief comes in the form of a new report or a proposal.
One day it is the Ravindra Verma committee report on labour law reform. It seems entirely in the realm of fantasy — particularly when you know what has happened to so many similar declarations in budget speeches and decisions of the same cabinet. Then it can be the N.K. Singh panel report on foreign direct investment which raises so much enthusiasm and then has the ideological immune system break out in rashes — another happy distraction.
The report withdraws tax breaks on housing loans in a phased manner. Maybe this will never happen — this report, like so many others, will gather dust. But for a salaried taxpayer, for whom a house is a huge, long-term investment, it will cause sleepless nights. This, when housing is a sector governments encourage with tax breaks to kickstart the economy in times of recession.
The really big break, we were told, was the acceptance of the Tenth Plan document to boost the feel-good factor with the promise of eight per cent growth. But since the three things on which that promise is underpinned — 7.5 billion dollars annually in FDI, Rs 16,000 crore per year in disinvestment proceeds and labour law reform — are fantasies of the Bollywood scale, this too will end up as no more than another valiant Johnny Walker act. Finally, now we have the Vijay Kelkar report on direct tax reform.
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Nobody who knows Kelkar would question his commitment, good intention, or his intellect. But, in the past, as with his oil sector reform report, he was known to be the middle-path wala, somebody who found options that looked softer but were possible to implement. This report, contrary to his style, is much more radical. Like, (since he uses so much of cricketing simile) a Sunil Gavaskar or Rahul Dravid employing the reverse sweep. No problem even with that except that consistency in pace and direction is the very essence of a reforming tax regime. The broad consensus on reform implies there shall be no great surprises, swings or turns as we go along. This one veers off on a tangent. I’m no expert on taxation or finance but straight off the bat, I can see a couple of problems for the honest taxpayer.
How would you feel if you were an individual in a ‘high-tax’ bracket (which is anybody paid around Rs 20,000 a month) on the verge of buying a house. Your father passed away, fretting, to his last day, how he never had the money to do so. You think you can afford one now. Real estate prices are the lowest in years. Housing loans are going at interest rates lower (9.25 per cent) than what your provident fund earns (9.5 per cent). Finally, even if you don’t particularly have a surplus at the end of the month to pay your EMIs, you can manage because of the tax breaks you get on interest paid.
This report withdraws that in a phased manner over three years. You don’t know whether it is actually going to happen or not. It is possible — likely — that this will also end up with some committee never to surface and give you insomnia. But it brings in uncertainty. For a salaried tax-payer (whom this report is supposed to help), a house is a huge, long-term investment. He would be much more insecure doing so if he suspected his tax breaks could disappear just like that, throwing even his fragile economics out of his mortgaged window.
This, when housing is a sector governments encourage with tax breaks to kickstart the economy in times of recession. Given Indian economics and interest rates, actually a much larger tax-break on housing is called for. It could encourage many more people to buy or build a new house, or move to a better bigger one. A new house, besides consuming cement, steel, paint, furnishings and more, also creates employment and, finally, results in the purchase of white goods. It also enables banks and financial institutions to park money profitably with the one category of borrower who is scrupulous in repayments.
What justifies raising the tax exemption limit to Rs 1 lakh a year? Most salaried employees are paid more than this anyway. So the penny drops. In one blow, personal income tax becomes the exclusive burden of the salaried employee while traders, shop-owners, so many professionals who prefer to be paid in cash rather than by cheque go right out of the net
Ask any banker what his safest, least NPA-prone protfolio is and he will say housing finance. That is why so many banks have been moving into housing at a time when they are laden with money good corporates don’t need and bad ones they are too scared to lend to.
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Overall, though, it is a good idea to minimise exemptions because these lead to tax leakage and complications. There is much else in the report that is welcome and long overdue. For example, abolition of dividend tax and wealth tax. But the problem is, this report does this in exchange for the truly unfair idea of raising the tax exemption limit to a lakh per year. It is difficult to see what justifies this.
Upto this level an individual’s tax outgo is very very small. But he still has to file a return, his details sit in a computer data base and he worries the tax man can come calling some day. This will immediately take 70 per cent, if not more, of today’s assesses out of the tax net. How does this square with this persistent one-by-six/one-by-seven effort of so many years to increase the base of tax payers. There was widespread cynicism when the scheme was introduced.
But over the years, it has become a real feather in the cap of the tax administration. Instead of turning our backs on it, a fairer solution could be to increase the tax slab and decrease the tax rate as is the practice in neighbouring Pakistan and Sri Lanka. So you might have to pay 4% up to Rs 1 lakh, 7.5% for income between Rs 1-2 lakh, 15% for Rs 2-3 lakh and so on. This will still maintain the taxpayers’ base while providing relief to a much larger number of genuine middle-class taxpayers.
The proposals, as they are, will benefit only the small trader who is loathe to pay tax. Most salaried, white-collar employees in the organised sector are paid more than this (around Rs 8,000 per month) anyway. They will not benefit from raising of the limit but lose small benefits like Section 88 and housing loan, in return for nothing. So the penny drops. In one blow, personal income tax becomes almost the exclusive burden of the salaried employee while the traders, shop-owners, so many professionals who prefer to be paid in currency rather than by cheque will go out of the net. And for so many years, we applauded so many finance ministers when they told us they were trying to do precisely the opposite.
There are good ideas in the report. But some, as explained above, are blatantly unfair. In any case, there’s so much that hits at powerful special interest groups (including the farmer) that it is unlikely it will be implemented in this form. It has nevertheless initiated a debate on direct tax reform. But really, the callousness with which the genuinely tax-paying (rather TDS-paying) salaried class is being treated is unnecessary.
The Sunday Express recently serialised highlights from the income declarations several senior ministers of this cabinet made to the prime minister. Many paid no more than Rs 15-20,000 as tax per year. Now let me ask a question: how many of you, reading this article, pay that little in tax? Does this mean you are richer than those ministers? Or does it mean that as a powerless, uncomplaining milch cow who cannot even ask how your tax-rupees are being spent, you only end up underwriting everybody else who finds ways not to be in the tax net? This is not comic relief. This is not even Johnny Walker in drag.