Tuesday, May 1, 2018

If Tax Collections Have Improved, why is Govt Trying to Tax Free Services of Banks?

Analysis is the ability to look at different data points and try and make an overall sense of the way things are.

This is something that rarely happens in the media, given that the media is more interested in reporting the news on one day, and then moving on to whatever is happening on the next day.

There is very little time to take a backseat and see the bigger picture, which is why, the media tends to typically miss the wood for the trees. The media may write/broadcast the first draft of history, but it rarely writes/broadcasts the first analysis.

In today's piece we look at such a situation.

In early April 2018, the Modi government reported a significant jump in direct tax collections and as usual made a lot of song and dance about it. The song and dance did not come as a surprise to us, given that this government specializes in managing the optics on different issues. (Like the recent song and dance about electricity reaching all Indian villages. Most Indian villages already had electricity when Narendra Modi came to power. What his government did was basically put the cherry on the cake (and not even the icing). Also, just because a village has electricity, doesn't mean all households in the village have an electricity connection. Wonder, why this data point wasn't shared by any of the ministers?

While, this is a great thing to have happened, the Modi government had a very small role to play in it.)

Getting back to the issue at hand. As finance minister Arun Jaitley said about the direct tax collections going up: "The data reveals the efficiency of tax department and rise in no. of honest tax payers. This historical revenue receipt is a factual testimony of accountable governance under PM @narendramodi ji."

We were skeptical about the jump and a recent action of the government has more than proved that. A little over a week back, it was reported that the government (Directorate General of Goods and Services Tax Intelligence (DGGST) to be specific) has sent notices to banks asking them to pay taxes and penalties on the free services they have offered to their customers over the years.

Newsreports suggest that the total amount of taxes to be paid along with penalties should amount to Rs 40,000 crore. The taxes are to be paid with effect from 2012, and include 12% service tax, 18% interest on that amount and a 100% penalty on it.

This is clearly an act of a government which is desperate to raise revenues. There are multiple points that crop up here:

1) If the direct tax collections have been as fantastic as claimed by the government, why is the government trying to tax and penalise free services offered by banks. The answer as we had suggested in an earlier piece, lies in the fact that the direct tax collections have been bumped up by going slow on refunds ( at least the data suggests that).

Further, a news report in The Economic Times said that hundreds of companies had received letters from the income tax department which requested these companies to deposit the tax deducted at source (TDS) with the government before the financial year ended. Typically, companies deposited the TDS by the seventh of next month. In this case that would have meant April 7, 2018, and the tax collected as TDS would have reflected in the government accounts of 2018-2019 and not 2017-2018.

By getting companies to deposit TDS in advance, the direct tax collections for 2017-2018, were bumped up. The trouble is that collections in April will now fall and that has to be made up for from somewhere.

2) As of December 2017, the banks were facing bad loans of close to Rs 9,00,000 crore. Public sector banks have accumulated more than 86% of these bad loans. To send banks notices demanding Rs 40,000 crore in such a situation is totally uncalled for. The fact that the government is ready to unleash retrospective taxation, even after saying that it won't, shows the desperation of the government on the revenue front.

On one front, the government is recapitalising public sector banks, and on the other front, it wants banks to pay taxes with retrospective effect. This just doesn't make any economic sense.

3) The central GST collections for 2017-2018 have not been up to the mark. The government expected to collect Rs 2.21 lakh crore. It has managed to collect just Rs 1.19 lakh crore, a difference of more than Rs 1 lakh crore and this money has to come from somewhere.

4) As we keep saying, there is no free lunch in economics. If banks are forced to pay this money out to the government, they will pass it on to their customers. Basically, the free services that banks currently offer will become chargeable. Further, charges on other services which are not free, might go up. If this goes through we need to get ready to pay money for something as simple as ATM withdrawals.

5) Also, in order to calculate a tax on anything, a value has to be ascribed to it. How have values been ascribed to free services going back as far as 2012? Beats us.

Long story short, the optics management of the Modi government is finally catching up with it. All is not well on the revenue front.


Vivek Kaul
Managing Editor, Vivek Kaul's Diary

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