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Column : Five simple suggestions for FM

Jun 30 2009, 02:40 IST
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SummaryMost expectations from the finance ministry around the Union Budget are unfair, irrational and imprudent. The ministry’s control of purse strings give it power, but it does not have the mandate to issue fatwas around issues that are multi-ministry and involve the legislature.

Most expectations from the finance ministry around the Union Budget are unfair, irrational and imprudent. The ministry’s control of purse strings give it power, but it does not have the mandate to issue fatwas around issues that are multi-ministry and involve the legislature. But the finance ministry can and must use its control over direct and indirect taxation to create incentives or remove distortions in India’s 3E agenda (employment, employability and education). A possible listing of issues that the finance ministry directly controls:

Review apprenticeship stipends: India’s current apprenticeship regime sabotages “learning by earning” and “learning by doing”. While the labour and HRD ministries review other constraints, the recent recommendation of the planning commission subcommittee on apprenticeships to give a 150% income tax deduction to apprentice stipends by companies could go a long way in converting employers to volunteers. This would not only expand workplace vocational training capacity by shifting the apprenticeship regime from push to pull but also accelerate this capacity creation in the organised sector. Another leg up for apprenticeships could be a go-ahead to the ministry of labour to match the ministry of HRD’s apprenticeship regime under which it currently reimburses employers half the stipend paid. India’s pathetic performance is demonstrated in our 2.5 lakh formal apprentices while Germany has 6 lakh and Japan has 11 lakh.

Remove service tax on vocational training: The applicability of service tax on private vocational training not only distorts the playing field against the private sector (since it is not applicable to government delivery) but imposes the burden directly on students as they do not have any offsets. Accelerating, widening and deepening skill development are key objectives for the government and removing this service tax would greatly increase capacity and quality of vocational training. Many people who need vocational training cannot afford it and the current service tax regime only raises the costs that students have to pay for “repair”.

Review service tax calculation on temporary staffing: The applicability of service tax on the gross billings of temporary staffing companies (huge self-interest disclaimer) greatly retards the growth of the organised industry. The lack of service tax enforcement on the 84.5 million people in this country with temporary jobs in the unorganised sector greatly hobbles the growth of the organised temporary staffing sector (3 lakh jobs). But more than 50% of employees in the organised temporary staffing sector move onto permanent jobs within a year and this is India’s most successful apprenticeship programme. Moving service tax applicability from gross billings to net billings would open up a whole category of apprenticeship opportunities that have no offsets (NGOs, banks, EOUs, etc). It would also substantially eliminate the regulatory arbitrage that creates opportunities for labour contractors to scalp labour market outsiders that use temporary jobs as a stepping stone.

Unify pension tax regime: The New Pension Scheme (NPS) represents cutting edge thinking around pension design and old age security. But it has been saddled with an “ideal” tax regime of taxed benefits while its competitors (PF, small savings, etc) enjoy exempt contributions, accumulations and benefits. The Budget must either bite the bullet and make everybody move to the “ideal” or it must give NPS the same treatment as everybody else. This is a precursor to allowing employees to move to a “backpack benefits” regime by paying their Provident Fund contributions into NPS. Another finance ministry intervention could be restraining the Provident Fund Organisation from using the income tax deductibility of contributions to company managed funds as a weapon to force them into its own fold because currently it does not have customers but hostages by extending the window for exempt fund compliance. Another small irritant that could be reviewed is the 20% one-time stamp duty on group term life policies that is sabotaging completion because the incumbent has an unfair advantage.

Enable migration of education trusts to for-profit structures: The HRD ministry is doing a rapid review of the bottlenecks that currently sabotage the expansion, excellence and inclusiveness of our education system. One of them is allowing for-profit institutions (rather than the current dysfunctional trust and charity structure). The Income Tax Department has probably been ahead of the curve by questioning the exemption for many schools under 10 (23C) but should rather create a platform for trust migration to company structure that would enable a huge inflow of investment into schools and colleges. The current dysfunctional ownership and tax structure leads to adverse selection in education entrepreneurs (most schools or colleges are set up by criminals, politicians or land mafia) or creates convoluted structures by which schools are broken up into management companies, asset owning entities and trusts that pay out service fees.

Obviously, the most important thing the finance ministry could do is linking their financing of the various ministries involved in education and skill development to outcomes. Our human capital regime needs more money (performance enablement) but there are higher upsides in spending money better (performance management). We need a shift from paying for training to paying for jobs.

The author is Chairman, Teamlease Services

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