After the Left has left, the first reform that is a must in respect of indirect taxes is to do away with the Law of Unjust Enrichment. This law was introduced into the Customs and Excise Laws in 1991 due to the persistence of the Public Accounts Committee which was immediated earlier headed by the Communists.
It is true that the Constitutionality of the law has been upheld by the Supreme Court in the case of Mafatlal Industries vs UOI[1]. But the Supreme Court was not required to look into the economic justification of the law. Laws can be constitutionally valid but not economically desirable like the Gold Control Act, 1961.
Now let me explain the unjust enrichment law in simple terms. If a manufacturer (or importer) pays , say, 40 per cent duty but holds that 25 per cent is the correct rate, then he pays the duty and files a refund claim. In the meantime he may add the higher burden of duty to his cost of production which he may recover from the consumer. But he may not also.
He is normally supposed to pass on the burden of higher tax to the buyers. After that if he gets back the refund of the 15per cent duty then that receipt becomes his windfall gain unless he proves that the burden has been passed on to the consumers.
This law was made in 1991 by amending Section 11 and Section 27 of the Customs Act. And the practice from 1878 was given a go by. Central Excise Act also introduced it.
If the refund is denied, the amount goes to a Welfare Fund. So this can be called Welfare Law. In effect, this so called Welfare Law has played havoc to the Industry and Trade and even in the Department. It has become a highly litigated subject.
A very large number of judgements have come from the Tribunal, High Courts and Supreme Court which have given different interpretations to different issues. Even some issues have been referred to the Larger Bench of the Supreme Court. Daily life for a tax payer is strewn with litigations on this issue.
Are all these complications, litigations, consequent corruption, etc really necessary to cause welfare? They preciously do the opposite. If the Indian economy which runs on capitalist principles has to prosper and compete with other capitalist economies of Japan, America, Europe and even China, it must be allowed to do so on a level playing field.
These countries do not have any such law prohibiting profit when it is made after paying the proper tax so long as the invoices and the tax paid amounts are legal and not forged.
The law of Unjust Enrichment assumes that a firm is always able to sell its products above or equal to its cost and duty. This is not true. So many companies go to BIFR because they undergo losses. This law does not provide for compensation for the losses but only denies the profit.
Profit is an engine of growth. If a firm makes profit it can take chances with innovations which may fail but such chances lead to advance in technology. Prices do not always have direct co-relation with cost. Price is determined by market forces. If the demand for steel rises in China, the price of steel made by TISCO and SAIL increases and vice versa.
The conclusion is that if this law is now abolished, Left parties would not succeed in stopping it in the Parliament. For good reasons, this reform must be done now to make the Industry and Trade more competitive and efficient.
