Friday, October 28, 2005

The Finance Minister - The Taxman shall not sleep.....

On 27.10.2005, Mr. Chidambaram, the Finance Minister, while advising tax payers to file their Income Tax Returns in time, indicated that salaried class might be spared from filing tax returns from next year provided there was no income from any other source. “We are considering the proposal” he said, adding that it depended upon how soon the tax department put in place the fully on line tax information network.

At first glance, the proposal should make the salaried class jump with joy for the small mercy that the ever-so-considerate Finance Minister proposes to shower on the honest salaried tax payer, whose tax is deducted already before he can lay hands on the fruit of his sweat and toil.

Looking beneath the surface, however, it appears that the proposal may not be so exciting as it sounds and further, there are other important issues involved.

There are two categories of salaried class from a tax point of view. First, those who do not have to pay tax in any case, considering their salary earnings after the usual salary related exemptions. There is no need in any case for persons in this category to file returns. The second category is of salaried persons whose salary income falls above the threshold and who are liable to deduction of Income Tax on their salary income. The tax on their salary income is already deducted by the employers in the first instance. Assuming that salary is the only source of income, this is the category that should benefit from the proposed dispensation from filing tax returns.

The real catch lies in the caveat: ‘provided there is no income from any other source’. Knowing that in our country there is a high propensity to save from the income, most salaried persons, even many in the non-tax paying category, are surely likely to have savings and investments to a greater or smaller extent. If a salaried person has any income from such savings, it could effectively exclude the person from the dispensation and make it necessary for the person to file a return. Tax Returns may also be required to secure any exemptions that may be available. The uncertainties related to determination of income due to the introduction of the FBT this year also add another dimension that might render the dispensation ineffective in practice.

It remains to be seen to what extent the proposal would be of benefit in real terms. On the other hand, it also begs the question whether the administrative burden on the tax machinery for monitoring would reduce or even increase.

Of more concern than the discomfort of filing the tax returns, are certain other issues related to Income Tax, that arise out of the Ministry’s proposed on-line tax information network. This network is supposed to enable the Tax Department to collect information related to an individual’s financial transactions. The main issues of relevance are:

Compromising a citizen’s right to privacy

The Government is taking increasing recourse to various service providers and agencies dealing with the citizens to collect information about them, ostensibly to assist in identifying tax evaders. Apart from employers, banks, credit card aganecies and other service providers like telephone companies, are also obliged to provide details of individuals’ transactions to the Tax Department. It means that a third party is being asked by the Government machinery to provide certain information about a citizen without the citizen’s express consent, without him being aware of what information is being provided and without him having an opportunity to prevent it being passed on. The right to privacy is a fundamental issue and that right is certainly being compromised to the extent that such information is being provided to a third party – even if that third party happens to be a Department of the Government – without the consent of the individual concerned.

To be sure, the Government will certainly advance a justification for this invasion of privacy but once such transgressions are allowed or overlooked, there is nothing to prevent an overenthusiastic administration from extending the principle further. The question of possible misuse, howsoever remote, of such information also needs to be kept in mind, even if the Finance Minister reportedly stated that the data remains accessible only to the CBDT.

The Tax Payer

The Cost of Compliance

The massive amount of data that have to be provided on a continuous basis to the Tax Department, certainly places an undue administrative and cost burden on the part of those who are supposed to comply with these requirements, with further consequences for not complying with the same.

There is nothing to prevent the Government from adding to these requirements for the purposes of facilitating its own work. If the requirements are confined to one tax today, they can, and in all likelihood will, be extended to other types of taxes as well.

These two significant issues are likely to result in citizens and others being affected approaching the judiciary for redress sooner or later.

At some point of time in the past, it was claimed that the Government was moving towards a trust-based tax system. How far such tall claims were justified in the light of events thereafter, is a question that needs to be answered. After all, the Finance Minister has just proclaimed grandly: "We have more information than what people think..”

Administrative machinery for using the data

Continuous generation of such massive amounts of data from the entire country will inevitably result in the need for a huge and permanent commitment of resources in terms of personnel and infrastructure, even if such data is processed electronically. After a period of time, the Department may well be so overwhelmed with the data as to make it difficult to make sensible use of the data except in a random manner. It would be reasonable to ask the Ministry whether such huge expenditure on the part of the Government as well as those who have to provide the data can be justified and the estimated benefits in monetary terms.

All in all, the actions taken by the Ministry in the recent past with regard to simplification of Income Tax do not appear to support the Finance Minister’s contention some time back that whatever was necessary has already been done. If anything, the introduction of FBT and the Tughlaqi idea of the tax on cash withdrawals tend to make the Tax rules more complex.

It is time for the Ministry to focus on further reviewing the concepts, structure and rules of the Income Tax and also try to do away with concepts and rules, which may not be relevant in today’s situation or may not be yielding significant results.

Thursday, October 27, 2005

The Judiciary - The Conscience Keeper

"Buta Singh... What is he doing here. Throw him out. A Governor can't have a house here."

These were the observations, - rather uncharitably singling out an individual who is, after all, also occupying a Constitutional position - made by a Bench of the Honorable Supreme Court on 25.10.05 in the course of the hearing of a Public Interest Litigation upon perusing a list of politicians (including Mr. Buta Singh) and others occupying Government houses beyond their allocated period.

A few days earlier on 20.10.05, a Division Bench of the Delhi High Court made these observations during the hearing of a public interest litigation against running of commercial activities in the residential area of West Patel Nagar in West Delhi:

"Take bulldozers out there and demolish all the commercial premises.''

"Don't bother about anybody, howsoever powerful he may be,''

"Officials of the local body are in collusion with people who indulge in commercial activities in residential areas. You (Corporation officials) take money from them and allow operation of commercial activities in residential areas. I know it and it has been happening in cities across the country, and the urban centres have converted into jungles due to this,''

On 26.10.05, delivering the Judgment in the case of Sri Jayendra Saraswati, Shankaracharya of Kanchi Kamakoti Peetam allowing a transfer of his case outside Tamilnadu, the Supreme Court had, inter alia, this to say (see Judgment):

“We have discussed above many facets of the case which do show that the State machinery in Tamil Nadu is not only taking an undue interest but is going to any extent in securing the conviction of the accused by any means and to stifle even publication of any article or expression of dissent in media or press, interview by journalists or persons who have held high positions in public life and are wholly unconnected with the criminal case. The affidavits and the documents placed on record conclusively establish that a serious attempt has been made by the State machinery to launch criminal prosecution against lawyers, who may be even remotely connected with the defence of the accused….”

While the first two are just passing observations during the hearing of a case, the last one forms part of the actual Judgment delivered by the Supreme Court.

In recent years, the Judiciary has been compelled to intervene more and more in issues that concern the actions of the Executive. At times, such as the instances cited above, and in cases such as dissolution of the Bihar Assembly, the Courts have shown their displeasure or disapproval over actions that are plainly against the principles of a responsible and impartial Government, whether Union or State.

It is unfortunate that a few feeble attempts were made to put the color of a confrontation between the three pillars of the State, on Judicial pronouncements. Nothing can be farther from the truth. As far as the existing legal structures are concerned, the Judiciary is the final arbiter under the Constitution. The Judiciary comes in the picture only when approached by a petitioner. To suggest even by innuendo, a confrontation by the Judiciary is to display immature thinking not worthy in a democracy that we wish to term as “mature”.

On the other hand, the increasing number of litigations against actions of the Executive, whether by way of PIL or private petitions, is demonstrative of the fact the people feel convinced about the wrong actions or inactions of the Executive. They also feel frustrated by an insensitive administration at the political as well as bureaucratic levels that bends the Rule of Law in letter or in spirit, with vested interests everywhere. That their convictions are justified is clear from the fact that especially in a majority of the PIL cases, the petitioners get a favorable decision, fully or partly, against the administration.

People may also be slowly losing their faith in the Legislature, as a protector of the people’s larger interests. Their perceptions are formed by observing the way in which proceedings in the Legislatures take place, with various political parties across the board allowing their members to conduct themselves in an undignified, often irresponsible manner.

These are serious developments that do not bode well for the Democracy and it is for the serious policy thinkers – if any there are – in the political parties to consider in a nonpartisan manner and prevail upon their parties to change course while there is time.

On second thoughts, this seems to be rather far-fetched to achieve, so that it is only the People themselves that will have to force the change.

Wednesday, October 12, 2005

FDI in Retail - Fooling the People

previous post

Rolling out the Red Carpet...

It is clear that the ghost of FDI in Retail has so seized the Government that no one seems to be capable of exorcising the ghost. (see previous article)

The enfeebled BJP and its other partners in the NDA have so far not found it necessary to unambiguously and forcefully articulate their position on this major issue of Trade Policy. Indeed, they seem to lack the will to function as a responsible Opposition beyond making perfunctory noises over issues of no great consequence. It is also clear that the Government is all set to ignore or steamroller objections from the domestic business community.

The only real objections that have received the Government’s ears have been from the Left parties. It remains to be seen, however, whether the Left would continue to advance its valid objections to resist the Government’s intentions or let the Government have its way due to political expediency. The Left parties have already succeeded in putting on hold the Government’s decision on disinvestment in BHEL, which is being seen as a major victory by them. They are also at loggerheads with the Government over its unexpected stand on the Iran issue where it obviously succumbed to pressures from our ‘could-be’ mentors, the USA. Sandwiched between these two major issues, FDI in Retail is an issue where the Left may well decide to give up its valid stand. It would be sad if that happens.

As far as objections within the various components of the UPA in Government are concerned, NCP has itself become a votary of FDI in Retail with the Ministry headed by Sharad Pawar actually mooting an extreme proposal to allow 74% FDI. RJD of Lalu Yadav is hardly capable of taking any principled stand on issues of Trade Policy. The other parties in UPA are likely to meekly accept the proposal without any serious objection.

The real reasons for persisting with this issue are not hard to seek. They are:

  1. Tremendous pressure being brought to bear on the Government by USA Government and the private interests like Walmart and the informal assurances that already seem to have been extracted by them from the Indian Government.
  2. Lobbying of the right kind with the powers-that-be, both within the Government and the key UPA parties, that can influence the Government’s decision.
  3. Miserable and abject failure to attract adequate FDI in other areas where it is really needed.

In pushing this proposal, the Government is all set to fool the people, by projecting that it is going to allow FDI in Retail only based on ‘tough’ conditions. The Government’s intent to hoodwink the people becomes clear when these ‘restrictive’ clauses are examined.

Minimum Capitalisation of US $ 5 mn.
As any one who is familiar with the Indian Retail scene would realize, this is not a restriction at all because any major Retailer that expects to enter the Indian Retail market in an organized way, would actually have to spend much more just to set up an economic operation in the Metro cities.

Permission to operate only in ‘just’ six metros.
Those in the Government who have thought of this ‘brilliant’ restriction must really have very low opinion of the intelligence of our people. As every one familiar with the Indian scene knows, the major action in Retail is taking place precisely in these metros. The Business Plan of any foreign Retailer entering the Indian market would naturally involve initial operations only in the metros where the maximum opportunities lie. Setting up shop in non-metros would be farthest from any foreign Retailer’s plans in the initial stages, without first achieving success in the metros. Putting this condition is actually favouring, not restricting the foreign Retailer.

Restrictions on number of outlets to 15 in each of the metros.
This is purely a restriction on ‘paper’, as it is naïve to think that a foreign Retailer would suddenly want to or be able to set up 16 or more outlets in a metro.

Minimum space of 5,000 sq. metres.
This is another instance of a laughable condition as a Retailer of the level of Walmart or Carrefour would certainly have a minimum space of that size in any case. At the same time, the dramatic impact of such large spaces being taken by foreign retailers on the prices of retail space in the metros could make it well neigh impossible for others to buy even small retail spaces. Already in parts of some metros, the prices are touching the astronomical level of Rs. 50,000 per sq.ft. even without the presence of foreign retailers.

Reserving minimum 50% space for food items.
This is just what the doctor ordered. This condition, which is made out to be a restrictive condition would actually be music to the ears of the foreign Retailer. As pointed out in one of the earlier articles, food and grocery are the mainstay of a major retailer and the customers coming to buy articles of daily necessities as food actually help generate business for the other products that a major retailer sells.

The FDI limit would be limited to 49% or 74% initially.
This limitation, so goes the argument, would enable the Indian JV partners to “imbibe the best management and procurement practices followed by international retail giants.” There is plenty of empirical evidence to suggest that the Indian JV partners would be bought out, sooner rather than later and as soon as feasible, by the multinational partners by adopting a host of tactics. Till the time that the Indian partners do remain, they will be merely name-sake partners having position on the Boards but no say in the business management.

In pushing this proposal, once again the now familiar arguments about helping the farmers are also raised. As has been pointed out in earlier articles, this would turn out to be wishful thinking. In any case, if farmers are indeed going to be helped by organized retail, they would as well be helped by the domestic retail players of whom there is no dearth. Once again, also the bogey that ‘mom and pop’ stores would not be harmed, has been raised. These arguments have already been dealt with in earlier articles.

The note prepared for the Cabinet supposedly cites that the Planning Commission, Finance Ministry and Commerce Ministry, all have endorsed the idea. Incidentally, it does seem that the Planning Commission may be getting too much involved with micro management of the economic development process, by specifically suggesting FDI in Retail. As far as the three conditions for the Left supporting FDI are concerned, viz. augmenting technology, generating employment and increasing productivity, FDI in Retail cannot be shown to satisfy these conditions except by convoluted and stretched reasoning at which this Government seems to be quite adept.

The Government also seems to be unable at this stage to quantify the level of FDI in Retail that would flow into the country. The reason is simply that the level of FDI in Retail would be too low to make any worthwhile impact, a point that was admitted at one time by the Finance Ministry. If the Government is convinced that significant FDI will flow in, let it make public its quantification and the calculations on which such estimation is based.

It is futile at this stage to once again highlight the real issues, which the Government prefers to obfuscate and gloss over. These have been discussed extensively in earlier articles. It is only hoped that wiser counsel, especially from the Left, will prevail and this unnecessary decision pushed back for a few years to allow the domestic retailer a reasonable time to meet the competition from international giants at least from a minimum level of strength, as was done by China. Heavens are certainly not going to fall, nor is the country's economic development likely to be jeopardised just because the Retail sector is not opened for FDI immediately.

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