Taxing Burden

If P. Chidambaram is beaming like Ali Baba, he has reason. He’s found the proverbial secret treasure (his revenue coffers are overflowing) and the magic code is “service tax”!

The finance minister is all set to table the finance bill in three months time, and quite certainly, he will do so with glee. Tax collections have shot up by over 30% and are running ahead of target. He has the booming economy to thank for. He should be equally grateful to the Indian middle class for keeping his kitty overflowing, for he has been all too eager to tax away a bigger chunk of people’s income.

The best proof of that is the service tax, the burden of which is almost entirely borne by the urban middle class. The rate of tax has risen by 140% (from 5% to 12%) in the past six years, with Chidambaram contributing his bit by hiking it from 10% to 12% in March 2006 (see chart).

For taxpayers that’s as bad as price inflation of 140% over six years on services under the tax net. The rising rate wasn’t the only affliction. The number of services included under the tax has increased every single year. No wonder service tax collections have almost tripled in three years.

Sure, service tax is progressive — rich pay more of it than the poor because they consume more services. So the finance minister is better off raising revenue through this tax than through indirect (customs or excise) taxes. But even then, raising the rate to 12% was hasty and may have contributed to the inflation Chidambaram is now trying to fight. Inflation is a tax of the worst kind because it hits the rich and poor in equal measure.

Hiking taxes in times of high inflation is a double whammy to consumer demand—which is the driving force behind the current boom. If that was not enough, an additional blanket education cess levied in March 2005 has inflated the cost of virtually every product or service, and has put more money jingling into the coffers. Worse, very little is known about the utilisation of this money.

So what do we, the 300-million strong urban middle class, want from the finance minister? Some or all of the following: a reduction in IT rates, raising of section 80C ceiling beyond Rs 1 lakh, reduction in customs duty (with a proportional adjustment in excise). And about the cess?

Tell us what’s it being spent on. Or scrap it. Ten years ago, Chidambaram slashed income tax rates—much to the dismay of the current prime minister—and proved successfully that lower rates can translate into higher revenues a la Laffer Curve.

It’s time for a Dream Budget encore.