Commentary/Yazad Darasha

A MATted Web

The finance minister proposes. The stock market disposes. That seems to be the history of economic reform in India.

The latest example being the raspberry the stock market gave to the proposal to levy a Minimum Alternate Tax on companies that, by virtue of certain notified investments, were paying no tax at all.

Last Wednesday the verdict was absolutely clear. The stock market is in the doldrums because of the proposal to levy MAT. That is the one largest factor. When Prime Minister H D Deve Gowda promised that his government would do everything, review any decision, to ensure that the stock market remained healthy, the market went into a bull frenzy and rose 140-odd points.

It thought Deve Gowda meant his government would repeal MAT. When the market realised that the prime minister had not once specifically mentioned MAT, the bears returned with a vengeance.

But then, what does the market have against MAT anyway?

For one thing, it comes at absolutely the wrong time. It comes when other economic factors have made money so expensive, that most corporates are finding it tough to raise working capital at affordable rates. Profit volumes are thus being squeezed by a slowdown in industrial activity.

Look at some of the evidence. It is not only the big corporations who are suffering. Medium-sized listed companies too are feeling the pinch.

According to an ICICI survey, 55 out of 60 hitherto profit-making companies have become non-performing assets where ICICI is concerned, because they have defaulted on payback of term loans for the last two quarters.

Another survey by ICICI has bleak news for the next financial year as well. Tracking the decline in sales as well as profits of over 600 companies, the survey points out that net profit in 1995-96 rose at the rate of 12.5 per cent, compared with 87.9 per cent in the previous year.

Gross profit for 1995-96 rose at the rate of 21.2 per cent, as against 1994-95's 48.1 per cent.

The fall is attributed to a higher cost of production; zooming interest payments (a whopping rise of 30.3 per cent against 4.2 per cent in 1994-95); and, significantly, a higher rate of taxation. The effective tax rate rose from 14.1 per cent in 1994-95 to 17.7 per cent in 1995-96.

So at the very juncture when companies are reeling under the blow of higher production costs and interest payouts, comes the other whammy in the form of a mandatory, minimum tax. All the tax planning of years -- in the form of investments in notified avenues -- has suddenly gone down the drain.

Is it any wonder the stock market is up in arms?

It has been proved beyond a shadow of doubt, all over the world, that the lower and more rationalised the rates and structure of taxation, the higher is the compliance. The history of taxation has proved that collections -- voluntary collections -- rise satisfyingly when the rates are rational.

When former finance minister Manmohan Singh began the process of lowering and rationalising the Indian tax structure, he put the country on the right course. He knew that whatever was lost in the way of lower rates would be made up by way of higher compliance.

At the most basic level, the personal income tax returns form was made more user friendly, prompting more individuals to file returns and thus declare taxable income. This process was expected to move into the echelons of corporate taxation as well. Mainly because it was seen that collections increased when the procedure was streamlined.

But then, it has also been proved conclusively that politicians do not heed the lessons of history.

Instead of streamlining, Finance Minister P Chidambaram appears to be stirring the murky ponds of corporate taxation in a pathetic effort to raise more money for his spendthrift government to squander.

And what does Chidambaram have against Indian industry anyway? First he lowers import duties. This makes the Indian manufacturer more susceptible to foreign competition. Then he slaps absurd taxes that make irrelevant, in one stroke, the tax planning of many years. And all this at a time when the cost of capital is so high that industry is reeling already.

Makes you wonder, doesn't it, what the ultimate game plan is. Makes you wonder if the finance ministry is operating on the basis of any plan at all.

As ICICI non-executive chairman Narayanan Vaghul has said: "Working without a vision is like putting together a jigsaw puzzle without having a picture before you."

The way things are going, Chidambaram appears to have a single-point agenda. Raise as much money as possible in as short a time as possible through as painless a means as possible. Because the government is unlikely to last too long; let's stash away as much hay as we can, while we can.

If that is a cynical view, I would like to hear one that is defensible on the subject of the finance ministry working from a rational, set, nation-building agenda. And forget the Common Minimum Programme. The government already has.