T N Pandey: Ad hoc tax levies recipe for disaster

TAXING MATTERS

Since past few years, a tendency on the part of the government to raise revenue by surcharge and cesses has been fast catching up with tax policy makers.

In the context of the income-tax, frequently resorting to surcharge and meddling with prevalent rates of such levies have almost become a practice.

Raising revenue through surcharges is not a normal feature of a stable tax system. The philosophy behind surcharges was deliberated upon while formulating the long-term fiscal policy in 1985 and the view reached was that raising of revenue through surcharges should be resorted to when unforeseen, unprecedented or unexpected situations arise like internal and external emergencies, drought, floods and earthquakes, and not for the financial needs of day-to-day functioning of the government.

For that, if funds are needed on a permanent basis, it should be raised by increasing the rates or adjusting the slabs and not by taking resort to imposition of ad hoc surcharges.But that is happening since many years.

Annual feature

The surcharges have become an annual feature of the Finance Acts. Not only that, no rationality or reasoning are followed for prescribing the rates.

The glaring example of this is making individuals and the Hindu united families, having income exceeding Rs 8.5 lakh to pay surcharge at the rate of 10 per cent of the income-tax, while artificial tax entities like companies and partnership firms are to pay surcharge at the rate of 2.5 per cent, whatever may be their total income.

There is no justification for making such discrimination. It tantamount to taxing efficiency at individual levels.

Cess

The modus operandi for increasing revenue has been further enlarged by a new word 'cess' on the lines of surcharge.

It is a super levy, which is levied even on surcharge. Faced by compulsions of coalition politics, an education cess has been perceived.

Paragraph 153 of Finance Minister P Chidambaram' the Budget speech of last year reads: "Finally, there is the tax mandated by the national common minimum programme. This is an education cess on all taxes. I propose to levy a cess of 2 per cent on the income tax, corporation tax, excise duties, Customs duties and service tax".

This cess is leviable even on surcharge amount. Further, there has been a pick and choose in the levy of this cess in as much as the securities transaction tax has been exempted from the levy of this cess.

Not only the above levies, there is also a proposal for cess on turnover or gross receipts of companies for the purposes of rehabilitation or revival or protection of assets of the sick industrial companies under the draft companies Bill contained in the concept paper released for discussion. Once this cess comes, this would be another levy, which the taxpayers will have to suffer.

In the zest for levying taxes, the legality of the charges imposed is not also examined.

In the context of taxation of dividends, the law exempts dividends from tax in the hands of the shareholder but makes the company distributing dividends' liable to pay tax on the dividends distributed at the rate of 12.5 per cent, whether it is distributed out of current income or out of accumulated profits from the past years, which is designated as 'additional income-tax'.

Obviously, the dividends paid cannot be considered as income of the company, distributing the dividends, justifying a second taxation. The accepted view regarding income has been that it is an 'incoming' (income comes in) and not an outgoing. The income is in the nature of return for labour, for skill bestowed or as return for capital invested.

Entry 82

The courts have gone to the extent of saying that income could arise when one uses something himself. But no decision has been given, which says there is income generation to oneself when a person distributes or pays his or its income to someone else.

Even, the broadest interpretation of Entry 82 in the Union List cannot support the view that outgoings can also be considered as income for levy of "additional income tax", in the hands of distributors of such income.

In certain situations, prescribed by law, outgoings may be liable to the "expenditure tax"""but, certainly, such outgoings cannot be subjected to the so-called additional income tax, surcharge and education cess. To the extent distributed dividends are being subjected to these taxes, there is certainly anomaly and illegality in the system.

Further, by taxing income in the way prescribed under Section 115(O), there is double taxation of the same income in the hands of the corporations first when the income is earned and second again when it is distributed.

Thus, the ground on which dividends have been exempted from tax is perpetuated by tax on distributed dividends. Of course, tax on distributed dividends may be justified on the ground of its being an expenditure tax as being akin to interest.

The tax proposals, in many situations, are conceived of in a huff and given effect to without finding out about the impacts of such proposals when enacted would produce on the desire of taxpayers to make and compliance and on the credibility of the governments functioning.

Finally, the cess proposed in the concept paper should be studied with all seriousness before implementing it. It is necessary that there should be a suitable coordination between various ministries to ensure that the corporate sector is not unduly financially burdened in the background of global competition.