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Rediff.com  » Business » FBT flouts Income Tax Act

FBT flouts Income Tax Act

By Ashok Kumar
May 09, 2005 12:03 IST
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Having successfully waltzed the political tightrope with the Budget, Finance Minister Palaniappan Chidambaram delivered a sucker punch to the common man.

Following a huge public outcry, the finance minister was constrained to partially roll back two seemingly senseless tax proposals -- withdrawal tax and fringe benefit tax.

Perhaps, he feared that the practical option of a complete roll-back would bestow him with the title of a 'Roll-Back Finance Minister'.

Perhaps, with the passage of time, he will realise that ministers come and go; people forget them, but not their legacy.

The new tax structure

At a time when domestic corporates are growing by leaps and bounds in the international arena, the last thing they needed was to have the ground cut out from under their feet.

That is exactly what the draconian FBT appears to do. Those who are blissfully unaware of the basic tenets of the Indian taxation system may opine that too much of a hue and cry has been raised about this tax.

The fact, however, is that FBT is in direct contravention of section 37 of the Income Tax Act which states that all bonafide business expenditure made in the process of earnings income will be fully allowed as a deduction.

Yes, there is no dearth of those who book bogus expenses in their books, but surely one does not burn a house down to flush out a rat.

Would it not have been simpler to phase out some of the tax exemptions that have long outlived their utility? Perhaps, rational thinking does not suit the political tightrope waltz routine.

Unfortunately, the corporate sector's response to FBT was muted. Most representatives of the corporate sector committed themselves too early by bending backwards to shower accolades for the finance minister in the form of marks on television channels.

Compare their response to the aggressive gesture of Mumbai's top stock-broking fraternity who made the finance minister eat humble pie a year ago when securities transaction tax was introduced, and you will realise what I am seeking to convey.

The last blow on the beleaguered tax-payers back comes in the form of the proposed exempt-exempt tax (EET) which means that hitherto tax-exempt instruments like Public Provident Fund could now come under the tax net at the time of withdrawal.

Against the backdrop of the fact that India still does not have any social security system in place, even draconian is too mild a word to use for this proposal.

As for the bourses, these proposals could not have come at a worse time. However, the fact remains that the Indian economy still has the inherent strength to steam ahead (with help from the monsoon Gods), notwithstanding irrational policies.

Some time ago we raised the question whether merchant bankers are killing the goose that lays the golden egg through aggressive pricing of public issues.

In less than a fortnight, the answer is becoming evident. There is a discernible slowdown in the fund raising activity.

All of a sudden, primary market offerings, which were hitherto flowing thick and fast, have almost dried up, with only two small-sized companies going public during the first half of this month compared to seven in April and eight in March.

Though many companies have announced IPO plans, the fact remains that many of them are yet to file their documents with the Securities and Exchange Board of India.

The current year has thus far witnessed a total of 18 primary market offers, including IPOs and subsequent public issues.

The aggregate sum raised thus far exceeds Rs 9,000 crore, with the main contributors being the big-ticket issues of Punjab National Bank (offer size Rs 3,120 crore), Jet Airways (Rs 1,899 crore), Oriental Bank of Commerce (Rs 1,363 crore), Allahabad Bank |(Rs 820 crore) and Jaiprakash Hydro Power (Rs 576 crore).

That most of these issues have disappointed investors post-listing must not be attributed merely to deteriorating secondary market conditions, but also to the obvious fact that their pricing was flawed.

Given that there is still no dearth of investible funds and against the backdrop of the shaky secondary market sentiment, the logical beneficiary could be the primary market.

However, for that to happen, the merchant bankers and promoters of those companies seeking to make public issues must display the sagacity and good sense to price their issues in a manner that a fair slice of the cake remains on the table for the investor.

After all, who would want to attend a party where the host has already eaten the cake, leaving only the crumbs to the guests?

The author heads Lotus Knowlwealth, Mumbai. Disclosure: He has no outstanding interest in the shares of the companies discussed here.

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Ashok Kumar
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