Commentary/Yazad Darasha

Gambling to Win

Giveaways, giveaways, giveaways. Not that anyone is complaining. The taxpayer certainly isn't complaining. Neither is the farmer. The stock market isn't, and nor is industry. Everyone is happy with the budget that Palaniappan Chidambaram presented for fiscal 1997-98.

Then why do I have this niggling feeling that something is not quite right? Could it be that pleasing all sections of society, as we so quaintly refer to the diversity of India, entails a price to be paid somewhere down the line?

And that the price may be heavy? Perhaps that is it. Perhaps the feeling is that the finance minister has given altogether too much away. That is what former finance minister Manmohan Singh too has said, his rationale being that India is too poor a country to give up so much revenue that could have been used for the development of backward areas and backward sections of society (there's that ridiculous phrase again!).

Yes, that's it! Not that Chidambaram has sacrificed the good of the poor to benefit the rich (ostensibly he has not done that), but that he seems to have taken - there is no other way to describe it - a huge gamble.

By taking the axe to the incoming moolah, he has gambled that the revenue will actually increase! How would that work? By Chidambaram's own reckoning, he would like to raise the revenue inflows by 15 to 16 per cent. How is he going to do that by cutting income and corporation tax, excise as well as customs duties and exempting dividend from tax in the hands of the shareholder?

All these, according to most learned estimates, are going to set the Indian exchequer back to the tune of some Rs 160 billion. How to fill the gap? The answer, again according to Chidambaram, is simple. The FM would like to widen the base of those paying tax in the highest slab of 30 per cent.

Currently, in a country with a population of over 950 million, only 12 million file income-tax returns. And of these, only 12,000 - yes, a measly 12,000 - are in the highest tax bracket. By reducing the highest marginal tax rate to 30 per cent, Chidambaram hopes to increase the number of persons paying the tax rather than evading it.

At the same time, he has promised to increase the enforcement factor. In other words, he wants the Income Tax Department to actually go out and find people who would fall under the tax net, and tax them. Can this work?

According to eminent chartered accountants, reducing the tax rates will certainly increase the number of people paying tax. However, these worthies - from some kind of justified or otherwise cynicism - say the increase in the taxpaying base would be less than 2 per cent. Yielding an increased revenue of under Rs 1 billion. Not worth it, they say.

But the same persons are quick to point out that the dark horse mantle would rest squarely on the shoulders of the Voluntary Disclosure Scheme enunciated by the finance minister. This is the eleventh such VDS in the history of Independent India, and also the most liberal.

Bring your black money back into the system, it exhorts, and you will have to pay only the highest rate of tax on it - 30 per cent - with no questions asked about the money's origin, and no penalty being levied.

Of course, if you have been diligently and honestly paying tax all these years, you might as well ask your rich neighbour to kick you squarely in the behind for being such a fool.

After all, if you had evaded your taxes and salted away bricks of currency notes either in India or abroad, you too could have got away with the largesse our finance minister has bestowed on your rich, black-money-hoarding neighbour.

You deserve that kick. At least, that is the message received by all us stupid, honest sods. Nevertheless, you may feel a little vindicated a year down the line when you are likely to find out that the VDS did not, after all, live up to expectation, and the collections weren't enough to exactly set the national till ringing.

After all, who believes in his black heart that the tax man will not ask questions about the black money's origin? Or that the tax man will not mark the hoarder out for some extra careful scrutiny in the years to come? The bottom line being - who needs the aggravation of being branded a black money man?

On the other hand, those who are sick of their hair turning grey over their black hoards, and those sick of paying the real cost of owning black money, in the form of lost returns on the money, are extremely unlikely to find another opportunity this good to end their headaches.

Besides, the finance minister seems to be banking on some heavy-duty promises made to him by industry chieftains that they will bring in their hidden wealth from abroad if the price was right.

And the way the VDS is constructed, the price could not be more right. So the VDS also, like the lower marginal tax rates, seems to be one hell of a gamble. Hope it pays off.

And finally, the last gamble of a desperate man - disinvestment of equity held in public sector enterprises. Chidambaram has targeted some Rs 50 billion from this avenue, not quite enough to cover even the loss from the reduced customs duty rates, but a welcome splash in the kitty if it happens.

If it happens, yes. The first requisite for a successful disinvestment - as all of us who are stuck with depreciated bits of paper know - is a vibrant and upwardly mobile stock market. This condition Chidambaram has tried hard to induce in our hitherto supine markets by his series of giveaways, including giving companies the right to buy back their own shares and turning the hated Minimum Alternative Tax into a credit.

The stock market responded by breaching the 4000 points barrier in post-budget trading, with Bombay Stock Exchange President Madan Gopal Damani even going as far as to proclaim that the Sensitive Index would hit 5000 points by Diwali! Dreams die hard, however.

And the market has now settled into a more or less prone (otherwise known as flat on its face) position in the three weeks after the budget. Whither disinvestment now?

I wouldn't blame Chidambaram if he felt a little let down by the market's behaviour. But then, should he have gambled so heavily with the available alternatives of increasing revenue? Actually, I for one am hoping the gamble pays off. It is a brave attempt and deserves some reciprocal support.

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