Date:19/06/2004 URL: http://www.thehindubusinessline.com/2004/06/19/stories/2004061900031100.htm

Back Plan before you Budget

T. N. Pandey

T. N. Pandey looks at how successive Budgets have burdened themselves with too many amendments to the tax laws

THE history of Finance Bills shows that they have been loaded with numerous complex as well as routine amendments. As can be seen from the Table, in the six Finance Acts, a number of amendments have been pushed through. Through long-winding legislative language, the Finance Bills are spread over 176 closely printed pages of small lettering. Only 52 clauses are on `other direct taxes', the relate to income-tax. Thus, of the 827 clauses in six years, 576 are on direct taxes, making up nearly 70 per cent of the total legislative proposals concerning direct and indirect taxes.

The main thrust in the past has been on the ushering in of a number of significant amendments to direct tax laws through the annual Finance Acts. Some examples of changes of a strategic and fundamental nature which have been brought in through the Finance Acts relate to:

Business restructuring and reorganisation (Finance Bill, 1999).

Tax holiday for the infrastructure sector and changes to MAT (Finance Bill, 2000).

New law relating to taxation of perquisites and tax holiday for core sectors of infrastructure (Finance Bill, 2001).

Abolition of dividend tax, the reintroduction of dividend tax, the withdrawal of Chapter XXC and the introduction of complicated provisions concerning transfer pricing (Finance Bill, 2002).

Abolition of dividend tax (Finance Bill, 2003).

That the provisions introduced through the Finance Acts lacked clarity and were not well thought of have been accepted in the Budget speeches and the Explanatory Memoranda. Here is an example:

Paragraph 153 of the 2000-01 Budget speech reads thus:

"Last year, my proposals on corporate restructuring were widely welcomed by Indian industry. However, there have been persistent demands to clarify and rationalise some of the provisions. I, therefore, propose to remove ambiguities in this regard by making suitable changes in the provisions of the Income-tax Act."

Obviously, much thought could not be given to all the relevant aspects because of the paucity of time.

There are other such instances. In short, the Finance Act should not be used to bring in complex amendments. It should only deal with tax rates, tax brackets, basic exemption limits, urgent changes required consequent to court decisions or for plugging loopholes. Other changes should be brought in through the Amendment Bills, which can then be thoroughly debated and examined by the Standing Committee of Parliament, if necessary.

The following further suggestions need consideration:

The President's address to the joint session of Parliament refers to tax reforms. Decision in this regard should be not be taken hastily.

The Expert Group was initially asked to give its report (a draft of the new I-T Act for the country) in five months, which was later extended by another two months. Obviously, the time schedule was unrealistic and no detailed work could be done even on the limited terms of reference as formulated. Thus, it was a wasted effort.

In this context, the appointment of the Carter Commission in Canada in 1962 for suggesting major reforms in the tax system would show what a realistic approach in fixing time schedule is. The Canadian reform passed through three major stages. In the first, the Canadian tax system was studied in detail by a group of tax and public finance specialists resulting in a six-volume report with 27 supporting staff studies, which were presented to Parliament in February 1967. The report provided a blueprint for tax revisions that would have fundamentally altered the existing system by systematically defining income according to the definition of Henry Simons. The second stage began with a national debate on the Carter Report and ended with the publication in 1969 of a White Paper containing the government's proposals for tax legislation. The White Paper, while not so sweeping as the Carter Report, nevertheless made important changes in the distribution of the income-tax burdens.

The final stage began with the Parliamentary debate on the White Paper and ended with the enactment of Bill C-259 at the end of 1971.

The exercise, which commenced in 1962, ended with the passage of the Tax Reforms Bill in 1971. Obviously, tax reforms cannot be done in a few months. Hence, there is need for much planning before launching a programme of tax reforms.

(The author is a former chairman of the CBDT.)