TAKING A BREAK

Personal medical reasons currently compel me to take a break from posting. My gratitude for your consideration.

Jaiwalker

CHIDAMBARAM STRIKES

The Central Board of Direct Taxes had issued a circular to the effect. The industry was disinclined to take it as true. Just about a fortnight before the Lok Sabha (the lower house of parliament) passed and voted on the Union budget on August 26, the finance ministry put its seal of approval on that circular. With that, it was made true and official. Thus struck Mr. P. Chidambaram at India’s IT industry, still nascent yet fast growing and attracting the whole wide world towards it like no industry worldwide so far did before.

Mr. Chidamabaram’s striking at it may seem axiomatic. Why not makes a growing industry pay the exchequer? And why not when all in the world are benefiting by it? And yet why not when the industry is making a whirlwind by becoming a world phenomenon?

Sounds logical. But look at the reality. The logic then would look the other way round. Which is to let the industry thrive, to let it employ more and also spread employment far and wide, to let it create new resources in work and workmanship, and to let it add to gross domestic product as well as the country’s foreign exchange kitty.

Particularly since the industry has sprung up from nowhere, found its roots by itself, added to its achievements year after year, and now become an apple of all eyes in the world, while in a spirit of globalisation enveloping the planet it has put the country on the world map like no industry did before.

Why must such an industry be put on a par with other industries in tax laws is a question Mr. Chidambaram needs to ponder.

For this is what Mr. Chidambaram has done in putting approval to the CBDT’s circular on IT industry in regard to its now rapidly increasing Business Process Offshore (BPO) activity as follows.

“If there is no business connection (between the outside business and the locally established unit),” so says the circular, “the resident entity will not be a Permanent Establishment of the non-resident entity.” In such cases, explains the circular, the Indian BPO unit will be assessed to Income Tax as a “separate entity”.

If, however, the non-resident firm does have a “business connection” with the resident Indian Company, it will be treated as a PE of the non-resident entity. Once a unit is established as a PE, says the circular, “the non-resident entity or the foreign company will be liable to tax in India”.

Pay taxes in India on business you do in India is the rationale of the CBDT’s circular on which as finance minister Mr. Chidambaram has signed his approval.

There appears nothing wrong on face of it. But not when, apart from the things said above about the industry, one considers that the enterprise is so closely tied in the world, continuously copes with changes occurring rapidly, and is constantly challenged by increasing competition from other countries.

Let it build upon its success can be one attitude of the powers-that-be. Make it pay while
it shines can be another attitude of those in authority.

A typical finance minister, Mr. Chidambaram has followed attitude two.

CHIDAMBARAM SURPRISES

Finance ministers are known to be parsimonious as well as unforgiving to taxpayers, denying in doling out to them and demanding of them to pay up. They cannot but be petty like this. For it is their business to raise revenue of government, not to cut it down.

So India’s finance minister, Mr. P. Chidambaram, caused a surprise when on August 18, eight days before Parliament was due to pass the 2004-2005 budget he had presented in the preceding month, he announced a cut in fuel taxes. He halved the customs duty on imported kerosene, a household fuel, to 5 per cent, and reduced the excise duty on petrol and diesel respectively from 26 and 11 per cent to 23 and 8 per cent.

The tax cuts to result in consumer prices to drop caused instant alarm bells of revenue loss to the government as well as of its revenue deficit (the difference in spending and income) rising. Both these were anathema to the finance minister and especially since when he presented the budget he pledged to wipe out the government’s revenue deficit put at 4.6 per cent this year by 2008.

Chidmbaram took the uncommon step, as he was obliged to in order to fight inflation. Inflation rate in India currently is reached a three-year high and risen still in the last two weeks from 7.6 per cent to 7.8 per cent.

However, inflation is measured in India, not by consumer prices, but by wholesale prices. It is also a key factor equating dearness allowance (part of salaries) of government servants. These not only constitute the bureaucracy. They also belong to defense and railways as well as state enterprises and nationalized banks and life and general insurance.

But inflation also affects the country’s growth, which is increasing in India, and which is furthered by lowered interest rates.

Cut in taxes was a way out to contain inflation in the circumstances.

But consider the position from the side of the economy.

Revenue loss on account of cuts made in fuel taxes is officially put at Rs.25 billion ($540 million). India’s top refiner, the Indian Oil Corporation, which is in the public sector, expects crude oil imports in the current year to rise by 11 per cent, as demand this year is to increase by 4 per cent more. Crude oil imports actually went up 23 per cent in July itself. Increased imports could mean more government revenue even when the import duty on kerosene is cut.

Excise, on he other hand, is an indirect tax levied on sales. Manufacturing costs of which energy is an important element contribute much to inflation. In energy billing industries’ grouse is of overcharging by the public sector Oil and Natural Gas Commission, whose costs though lower are equated to high international oil prices to which its selling rates are fixed.

Where the rub in inflation lies is then not much in question.

But Chidambaram can be washing his hands of it. For oil and petroleum products lie in the realm of another ministry.

So much for accountability made one of the planks by Prime Minister, Mr. Manmohan Singh, of the present government.