Monday, March 10, 2008

A feeble attempt to chart a new financial course

A FEW DAYS before Finance Minister TM Thomas Isaac presented the state budget, a television interviewer asked him whether it would be a populist budget or one with a sense of realism. He gave a clever answer: "It will be a populist budget with a sense of realism."

Three days after he presented the budget to the state assembly its character is still unclear.
His supporters claim that he has come up with a Left alternative to the Centre's liberalisation programme. Critics say he has adopted the neoliberal agenda.

There are, of course, many populist measures in the agenda. Since the Congress-led Central government's budget, presented a few days earlier, contained indications of early lok sabha elections (general elections), the Communist Party of India (Marxist)-led state government, too, had to take electoral considerations into account.

Besides offering a small increase in the paltry pensions now paid to various groups, Thomas Isaac announced a few new welfare measures too. The most important of them is an insurance scheme, which is an enlarged version of the one drawn up by the last government.

In this budget, Thomas Isaac has moved away from loud advocacy of deficit financing.
Until recently he was highly critical of the approach of the Centre and the previous state government, which were moving towards deficit-free budgets. He is now willing to limit deficit financing to the capital account only. He hopes to wipe out deficit in the revenue account by 2010.

The change in his attitude is the result of a hopeful turn in the state's finances, brought about primarily by improved tax collections. Fifty years ago, both Kerala's government and people were poor. The Gulf boom brought a measure of prosperity to sections of the people, but the government continued to be poor. Now, it appears, the government too can look forward to better days.

Most of the taxation proposals have provided relief to various sections. For instance, the tax on used car sale has been lowered and that on mobile recharge coupons has been dropped.

There are just a few proposals that will add to the costs. The most important of them is a one per cent cess of the value added tax, which the Finance Minister expects to yield Rs one billion.
To begin with, he was critical of Vat, but improved tax revenues seem to have persuaded him to change his attitude towards it.

While spokesmen of trade and industry have complemented Thomas Isaac on the budget exercise, they are opposed to the cess and want it to be dropped.

Even as he reduced the tax on all hospital equipment to four per cent, he imposed a 10% luxury tax on hospital rooms fetching rents of Rs1,000 or more a day. He expects the measure to yield only Rs10 million. Considering the proliferation of expensive hospital rooms and their high occupancy rate, this is a low target.

Some tax proposals are clearly aimed at achieving specific goals. The imposition of 12.5% tax on plastic carry-bags simultaneously with the total exemption of paper bags from tax is in keeping with the objective of promoting use of biodegradable products.

A close scrutiny of the proposals reveals the emergence of a new strategy to raise resources.
It essentially involves identification of areas of commercial profit and negotiation of specific deals with them.

In several sectors such as hotels with bars and jewelleries, provision has been made for compounding of tax at specific rates to ensure a certain minimum increase in revenue.
The rates were fixed in private negotiations held before the budget proposals were framed.
In the case of jewelleries, the compounding rate has been fixed at 150%.

In a post-budget discussion, Thomas Isaac revealed that in discussions with jewellers' representatives he had proposed a rate of 200% but eventually settled for 150%. The new strategy has ensured a 50% increase in the tax to be collected from the jewellers.
But it raises ethical questions in as much as private negotiations between the government and the trade offer scope for misuse of authority.

In this particular instance, the state may be losing more than it gains because the price the government has to pay for a settlement is to shut its eyes towards the large-scale tax evasion prevailing in the trade.

The Finance Minister has certainly made an attempt to chart a new financial course. But it is too feeble. With the state's finances showing signs of buoyancy, the time has come for the government to think of a comprehensive social security scheme instead of continuing with the piecemeal approach of the past. -- Gulf Today, Sharjah, March 10, 2008.

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