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Kick off interim budget with cut in income tax
January, 26th 2009

Ah, Its time for Indians to indulge in their four-year itch again. Its once again time for that great, once-in-four-years festival called general elections. Some starry-eyed call it a celebration of democracy, some see it as an opportunity to escape the long arm of the law and gain respectability, some see it as a time to forge new alliances, and then some see it as an opportunity to extract some fresh commitments from politicians when they are at their most vulnerable.

While in this high season of corporate governance, the government-in-powers balance of achievements and failures is expected to come under close scrutiny. But, the one other balance sheet of greater importance will escape inspection. The elections have given the government an escape route it will now have to present only an interim budget, which is a vote-on-account asking Parliament for funds to tide over all the must-spend expenses till the next government takes over and presents a full budget.

So, this government can only use the VOA opportunity to tom-tom its achievements, advertise its success with the economy (before the current downturn upset all their plans) and make some noises about how it cares for the poor, the farmers, the marginalised (in all its forms gender, religion and caste). With the Election Commissioner watching hawk-eyed, it cannot actually implement new taxes, though it can announce new economic measures. While presenting the interim budget in 1991, former finance minister Yashwant Sinha (as part of the Chandrashekhar government) had, for the first time in Indian economic history, announced the governments intention of divesting its equity in public sector units.

This government probably doesnt need to do much about indirect taxes since it has already implemented some tax cuts through its two stimulus packages. But, surely, the finance minister should be allowed to make some course corrections where gross anomalies exist. Here is the Mocha Masters list.

The government has loaded one cess after another on the income tax paid by individuals. This is taxation through the back-door, using a surreptitious route to milk the most under-represented political class. This also exhibits how the government, unable to stem the rot in its finances, is passing on its burden to the salaried class. The education cess, for instance, is the governments admission that it is squandering away the tax-payers contributions and needs more funds to fulfil its basic duties.

In the debate over stimulus packages in the US, some economists feel that tax cuts might achieve much more in reviving the economy than throwing money into one project after another. The Indian government could examine the option of removing the cesses as one of the viable alternatives for firing up the economy.

n Some sanity might also be required in the levy of service taxes. No one is complaining about the basic concept of service tax. If excise duty can be levied on manufacture of goods, then service tax is also logical, especially when services contribute to a good 50% of GDP. But, just like small-scale units enjoy tax breaks, there should be some service tax relief for home offices, to nurture entrepreneurship.

In these times of economic upheaval, the government will have to devise some strategy that encourages entrepreneurship, especially one that supports people who have been either laid off from their jobs or those who opt to work from their homes. And, service tax breaks for small-office-home-office can be a great booster shot, even if they are for a limited period.

n The time has also come to think of a maximum retail price for some services. Just like there is MRP for a wide variety of goods, which restricts the exploitation of the consumer in the hands of the manufacturer-wholesaler-retailer nexus, some kind of a similar arrangement is required for services also. For instance, take the airline industry. Although many of the private airlines are advertising low fares, these are deceptive.

For instance, if a private airline advertises a Rs 2,500-fare for Mumbai-Bangalore, the actual money paid by the passenger works out to Rs 5,500. Out of the hidden difference of Rs 3,000, a major component is scooped up by the airlines as something called fuel surcharge, which was imposed when oil prices had shot up. Now that the prices are down, the airlines are reluctant to pass on the benefits to passengers.

n Utilities, especially power suppliers, too have hidden costs. Today your power consumption might be just worth, say, Rs 2,800. But, your total bill might end up being as high as Rs 4,500 on account of various cesses, and cross-subsidies loaded on you. For instance, a typical Mumbai electricity bill includes the following items, over and above the energy charges which is based on your consumption of electricity standby charges, cost of expensive power, fixed charges, fuel adjustment charges, electricity duty and tax on sale of electricity.

If the government is serious about reviving the economy, the time might be right to review some of the hidden taxes, charges, levies that turn the economy into a high-cost island. The start could be made with some of the cesses on income.

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