The Hindu Business Line : Not stimulating enough

Talking about taxes, author John S. Coleman once remarked: “The point to remember is that what the government gives it must first take away.” In dark times such as the present, there is a school of thought that governments should give away a portion of what they have taken when the times were good.

A proposal in the US spoke about cutting taxes from 10 per cent to zero per cent on the first $6,000 of taxable income for individual taxpayers and the first $12,000 of taxable income for couples.

Taxpayers could receive rebates of up to $600 for individuals and $1,200 for couples. A minimum of $300 per person and $600 per couple would be available to those with at least $3,000 of earned income.

This relief would be available to everyone with adjusted gross income less than $75,000 for singles and $150,000 for married couples filing jointly. It will be phased out for taxpayers above those income thresholds. An additional $300 relief per child was also proposed.

Further stimulus

The new government plans to take this further and offer a better stimulus package early in 2009. Germany also proposed a package which amounts to about 2 per cent of Germany’s gross domestic product (GDP), includes tax breaks on purchases of cars, loans to small and medium-size businesses and money for roads.

Consumers can look forward to a one-year tax holiday for new cars and subsidies for certain household repairs, especially those enhancing the energy efficiency of buildings.

The International Monetary Fund (IMF), which normally does not interfere in such taxing issues, has commented that tax cuts should be aimed at people likely to spend money rather than save it. The package has to be large but carefully designed.

Tax cuts need to concentrate on individuals who were having difficulty getting access to credit rather than those who were saving instead of spending. It questioned whether decreases in VAT of just a few percentage points are salient enough to lead consumers to shift the timing of their purchases.

A taxing economy

Although the Indian economy has been minimally hit by the global crisis, our very presence as a growing economy has troubled business enterprises here. Layoffs are becoming the rule rather than the exception, factories are downing shutters to save costs and the general atmosphere is bleak.

The Government delivered a small package, the salient feature of which was an across-the-board cut in the Cenvat rate by 4 per cent. This did reduce prices of cars and other goods, but the moot point is whether a consumer would have made the purchase irrespective of the cut.

The last quarter of any year is festival time in India and vendors typically pass on largesse to consumers. By not touching the service tax rate, the Government may have missed the bus to further stimulate demand. Service tax is a sister of Cenvat and it is but expected that all family members are treated consistently.

Taxpayers complied with all increases in the service tax rate and the enlargement of the coverage over the years and they seem to be disappointed that nothing is being passed on to them in their time of need.

Automobile vendors are asking for applying the reduced rate even on the stocks they held prior to the rate cut, as it comprises a good portion of their sales. The Government levied cesses and surcharges for specific purposes — the purposes may have been served but the levy remains.

Taxpayers would feel a bit more apprehensive since we would not be having the annual Budget on the last day of February due to the impending polls. A vote-on-account normally does not disturb existing tax structures and the new Government may not opt to boil the ocean in their first Budget which makes us look at 2010 for major tax reforms by which time the recession may be history.

An intermediary stimulus package would have to be announced. Petrol and diesel prices were reduced after a long time but there was a glaring mismatch between the quantum of the frequent increases in these products and the one-time cut.

We are now certain of a dual Goods and Service Tax (GST) — Cenvat/service tax, on the one hand, and VAT, on the other — which is pretty much what we have now. If there is an intent on giving out a further package, the Government would have to just do it.

(The author is a Hyderabad-based chartered accountant. blfeedback@thehindu.co.in)

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