T. C. A. Ramanujam

Income-tax law is increasingly about levies on what is not necessarily income, says T. C. A. Ramanujam

NOW THAT both the Houses of Parliament have passed the Finance Bill, 2005 and the President has given his assent to the Bill, the income-tax law has assumed frightening proportions, what with the arming of the taxman with powers to levy fringe benefit tax (FBT) on employers and to scrutinise minutely withdrawals above a certain limit from banks. A popular misconception is that every change means progress.

The Finance Minister, Mr P. Chidambaram, has declared that direct tax reforms have been completed and that we are now ready for the introduction of a new modern income-tax law before the next Budget. Only those who mistake change for progress will applaud the tax reform measures undertaken by the Finance Minister. We had all thought that income-tax is a tax on income. But with the introduction of FBT, it now becomes a tax on expenditure of companies. Even here, there is neither uniformity nor equity.

The Government also bestows fringe benefits on its employees. However, neither the employee nor the organisation under the Government will be subject to FBT. The modifications announced do not take away the thrust of the argument against such harsh levies, which make the administration of the law cumbersome. The more complicated the tax law, the more corruption it breeds. With so much talk of the measures taken to plug loopholes in the law, the Finance Minister announced that the effective tax rate for companies will go up by a mere 1 per cent or 1.5 per cent. Could this not have been achieved by raising the corporate tax rate by that percentage or by making a presumptive disallowance of expenses falling for consideration under Section 37 of the Income-Tax Act, 1961? We have a similar disallowance for un-vouched expenditure under Section 40A(3).

The cash withdrawal tax is hard to digest and harder to understand. It is fortunate that individuals and Hindu undivided families (HUFs) engaged in business/profession and registered charitable trusts are excluded from this levy. Savings accounts have also being exempted. The 0.1 per cent tax will be charged on withdrawals from current account and encashment of term deposits exceeding Rs 25,000 on a single day by individuals and HUFs. Businesses — companies and firms — will have to pay tax if withdrawals exceed Rs 1 lakh on a single day.

Professor Aravind Kumar of the Centre for Economic Studies and Planning at JNU refers to reliable estimates of the black economy in India at about 40 per cent of GDP and observes that the Budget loses roughly Rs 4-lakh crore of taxes on this count — taxes that could turn the fiscal deficit into a surplus and provide adequate resources for social and physical infrastructure.

While tax evasion is reprehensible, arbitrary taxation is equally so; it is social injustice by the Government to the people. Nani A. Palkhivala had observed: "Tax evasion aggravates arbitrary taxation; and arbitrary taxation aggravates tax evasion. To break the vicious circle, while there must be every attempt to check evasion, there must equally be every attempt to stop whimsical taxation. There are various provisions of our income-tax law which are truly capricious. They are saturated and dripping with injustice."

The tax on cash withdrawals from banks is ostensibly aimed at tracking black money. Even after enormous debate, the Finance Minister insists that huge withdrawals from bank accounts go to swell the black economy. Why enact a law that spreads a net in which the innocent will surely be entangled and, perhaps, some wrongdoers as well. Amendments to the law are no substitute for patient and painstaking investigation into black accounts and transactions.

The Finance Act has hit several groups of taxpayers. By removing standard deduction for the salaried class, a honest group of taxpayers has been penalised. Senior citizens have lost out even after enhancement of the exemption. The abolition of Sections 88 and 80L will hit the middle class hard. The tax code itself has undergone a metamorphosis.

Already, the common refrain is that `income' under the income-tax law is not generally understood. Quite often, capital receipts and windfalls are deemed as income for taxation. The current legislation, though called an income-tax law, levies tax on transactions in securities, which may not result in income at all.

(The author is a former Chief Commissioner of Income-Tax.)

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