Wednesday, March 09, 2005

Something is really strange here ...

I have been wondering about the tactics that Chidambaram, our Finance Minister, employed in his budget. (A) He gives all kinds of tax breaks to both individuals and corporates. (B) He adds two provisions that introduce new taxes: the fringe benefit taxes on companies, and a tax of Rs. 10 for every 10K withdrawal from banks in cash.

Assuming that this year's economy stays the same as last year's, let us consider the following:

  • under the tax breaks in (A), he loses X rupees, and
  • under the new tax measures in (B), he gains a certain fraction f of X rupees (i.e., fX rupees).

Now, our society, like every other society on earth, loves its tax breaks. However, it does not much care for the exact magnitude of the tax breaks. In other words, if each corporate stands to gain Rs. 2 crore under plan (A), the corporates would be equally happy with 1 crore! This is because they would not even know what it is really like to have a tax break worth 2 crores or 1.5 crores or 4 crores or even 0.2 crores. The same argument applies to individuals as well. A tax break of 5K would make me about as happy as a tax break of 10K. You may say, "Come on, you dumbo, certainly 5K should make you less happy (even sadder, perhaps) than 10K!". You would be right, only when I am given a choice (post facto) between 10K and 5K; but before the budget speech, I have no idea about how much I am going to gain, so any tax break that he announces would first lead to a sigh of relief, and then to some happiness.

So, here is the bottomline: the very reality of a tax break seems to heighten the ecstacy levels of corporates as well as individuals. If you accept this reasoning, don't you think Chidambaram would have been better off to (C) give us a break worth only (1-f) X rupees, rather than giving us X under (A) and taking fX under (B)?

Now what has his choice of (A) + (B) given him? Does anyone praise him for (A) and then complain a little about (B)? Hell, no! He gets castigated for doing (B) everywhere, and very little praise for (A)!

If he had done (C) instead, do you think there would be any of this great noise about imposition of an unfair tax on 'legitimate business expenses'?

P.S.: (1) However, there is a distinct possibility that he probably knows much more than any of us (including me!) about his tax measures. My guess is that he is hoping to mop up much more than X through his measures under (B)!

(2) Another possibility is that he did not intend to incorporate (B) at all, except to deflect fire from the Left parties! This sounds more plausible if you look at the current fervour among the corporate types in giving Chidambaram a hard time; as a result, the Left cannot really complain that the budget is too business-friendly. Also, it is quite likely that the businesspeople have already been clued in on this, and they are playing their assigned role of complaining incessantly about the inherent unfairness in the budget!

(3) Perhaps, I have been reading too much of American press and blogs that make me see deep conspiracies everywhere I turn ... ;-)