Officials in North Block are wondering if a new tax will be mooted again and whether that will pertain to foreign investments.
With the Union Budget for 2007-08 less than 14 weeks away, North Block is full of Budget talk. A new team is in place in the finance ministry to steer the Budget work. Officers are busy compiling the revised estimates of expenditure for various Central ministries. The real work on the next years taxation proposals and the budgetary support for Central expenditure has not yet begun. Which is why this is also the time when finance ministry mandarins have the luxury of stepping back to take a detached look at the budgetary exercise in recent times and reflect on what direction it might take in the future.
For Palaniappan Chidambaram, this will be his fourth Budget as the finance minister in the UPA government. If one includes the two Budgets he presented in 1996 and 1997 as the finance minister in the United Front government, his tally in Budget presentation would go up to six. Most officers are unanimous in their view that Chidambaram would be most remembered for slashing the income-tax rates to 30 per cent a level that all finance ministers succeeding him have acknowledged as the benchmark rate for taxing incomes of individuals and corporate bodies. Minor tinkering has happened, but the basic rate has remained stable at that level since 1997.
Chidambaram would be remembered for yet another achievement of sorts. He has brought into the statute book the largest number of new taxes in the five Budgets that he has presented so far. He started with the minimum alternate tax (MAT) in 1996 to tax the companies which were using various exemptions to report zero tax liability. Then there was the securities transaction tax a levy that was imposed on the sale and purchase of securities, including shares and mutual fund units. The third new tax he introduced was a levy on withdrawal of cash from banks above a specified limit. And his fourth initiative was the fringe benefit tax.
Each of the new taxes he introduced was controversial. They evoked sharp reactions from different sections of society. He made some modifications to the original proposals, but at no point did he consider dropping them in view of the criticism. Over time, all these taxes have come to stay. In fact, these new taxes provide him handsome revenue every year. So, even while slashing tax rates, he has managed to levy new taxes to plug the revenue gaps or leakages.
This year revenue collections have been good and some officers believe that the finance minister may not be under any pressure to look out for new revenue sources. But an apparently innocuous statement from his advisor, Parthasarathi Shome, has set every officer in North Block thinking. It is an open secret that Chidambaram and Shome enjoy a very good equation and all the key Budget proposals are largely discussed and decided by the two of them. Officers come in only to work out the details and examine if their implementation would create any procedural problems.
What Shome stated at a public meeting, therefore, cannot be ignored. The reference was to the rising flow of foreign investments and the need to look at this from the taxation point of view. Considerable importance is being attached to this reference, as indeed there is fresh thinking on whether any tax incentives are required to attract foreign capital. There are recent World Bank papers that argue that the case for tax incentives to attract foreign investment is not compelling. It has also been argued that tax incentives neither affect significantly the amount of direct investment nor do they determine the location to which investment is drawn.
Foreign investment inflows in India have been rising steadily in the last few years. Last year, foreign direct investments were estimated at $3.7 billion, in addition to $12 billion of foreign portfolio investments. This year, there is a slowdown in foreign portfolio investments, but FDI flows are expected to double. With a finance minister, who has never shied away from exploring new avenues for taxation, officials in North Block are wondering if a new tax will be mooted again next February and whether that will pertain to foreign investments. If that happens, Chidambarams tally will be five new taxes in six Budgets.