JUNE 26, 2009

Union Budget 2009: Radical changes necessary; Economy calls for Long Term Fiscal Policy

By Arvind P Datar, Sr Advocate

THE unexpected and decisive victory of the UPA ensures that this Government will last for the next five years.  For industry, the major sign of relief was the decisive defeat of the Left parties and the diminishing role played by regional parties. This is the right time for the Finance Minister to chalk out a new plan of action without permitting politics to triumph over economics. It is only hoped that populistic schemes do not run riot as they have in the past five years. The Finance Minister should address two important issues over the next five years: first, the hopelessly complicated statutory provisions. Secondly, the rampant violation of tax laws and virtual inaction against tax evaders.

Long Term Fiscal Policy:

It is the right time for the Finance Minister to announce a Long Term Fiscal Policy (LTFP) as was done by V.P. Singh in 1985. The LTFP can lay down the roadmap for the next five years and point out the steps that have to be taken each year. This will prevent ad hoc measures that have been the bane of Indian taxation and public finance for most of the last six decades.

The LTFP must integrate the long-term goals  in direct and indirect taxes and also keep in mind the impact on the industrial and service sectors of other taxes like VAT, octroi and so on.   The LTFP should preferably be finalized after discussions with industry and other chambers of commerce.  Briefly, a LTFP will bring about much needed certainty.

Income Tax Act:

No Act has been more horribly complicated and mutilated than the Income Tax Act over the last five years.   There was absolutely no justification in introducing Fringe Benefit Tax (FBT), Banking Transaction Tax (BTT) and continuing the Minimum Alternate Tax (MAT).   The deductions under Chapter VI-A have been frequently amended leading to chaos and confusion.   The most important and urgent reform that the Finance Minister can make is to get rid of the sub-categories of direct taxes and impose a uniform income tax.   This will eliminate large amount of paper work and, as past experience shows,   will not reduce the total collection of tax.

There is a rumour that a new Direct Tax Code will be introduced this year.  If the past experience in Central Excise and Company Law is any indication, no purpose will be served if the existing provisions are simply rewritten or reorganised.   There is a serious case for consideration of the possibility of introducing a flat tax system.   This was introduced with great success in several European Union (EU) countries.   The scheme contemplates levy of one flat tax rate with no separate schedules, appendices     and other complications.   The results were astounding and led to remarkably higher collection of taxes.
 
Overruling Supreme Court / High Court decisions:

An extremely unhealthy practice that has taken firm root is the consistent policy of retrospectively overruling Supreme Court and High Court decisions.   First, this is not a healthy practice in a Republican Constitution where the rule of law  prevails.   In the US and UK, decisions of the Supreme Court have been very, very rarely overruled.   In India, it must be made clear that if a decision  has to be nullified,  it should be done only prospectively.   It is also a shame that after the  most unjust taxes are struck down, the collections are sought to be retained through a  Validation Act.   Serious  damage is  done to the rule of law  if  the State  has  scant regard for decisions of the Supreme Court and the High Courts.   A clear policy must be laid down that overruling of judicial decisions will only be prospective and Validation Acts should be passed in extremely rare cases.

Central  Excise  &  Customs:

The  most  important  reform  needed    is  the manner in which cases  are dealt  with from the stage  of  issuance of show cause notice till  the Tribunal.     In  several  cases,  the demand   made  in  the show cause notice,    is  absurd  and  fanciful.  Invariably,  every show cause notice is  blindly  confirmed  and  hearings, even  at the level of   the Commissioner are  a  mere  farce.   It is  doubtful if  several  Commissioners    write  their own orders  or  even   read  the  submissions  made.   The   orders  invariably reproduce the contents of the show cause  notice,  the  written  submissions given  by the  Advocates/Consultants,  and  then   follow the findings which merely confirm the entire demand.
   
Another necessary reform is the abolition of  Section 35F of the Central Excise Act, 1944 or  at  least  defer  the requirement of  pre-deposit  by a period of one  year.   Before the Tribunal,  it  leads  to tremendous  delay in disposal of cases as a lot of time is consumed at the interlocutory stage.    If   Sec.  35F  is  abolished,  it  will  save considerable  amount of  judicial time  as  CESTAT  can  straightaway  hear  and  dispose off  the main appeal itself.   Further delay is also prevented  as  unnecessary  writs are    presently being filed  against the orders   under   Sec.  35F. 

Service  Tax:  

This  branch  of  taxation has been  indiscriminately  extended   to  several  categories  where  there is no element  of  service  at all.  There has  to be  a basic  rule  which clarifies  that  wherever  a particular  transaction has suffered sales  tax  or  VAT,  no service tax  will be levied on the same  amount of  consideration.  The  Central Government has made  a  proper working formula  in the case of  “works  contract”,     The  area which suffers  sales tax  is identified and only that  portion of consideration which is  not subject to sales  tax is subject to service tax.   Alternatively,  the   assessee is  given the option   of compounding.  
 There is a serious  need  of  evaluating the category of  service tax.  Similarly by  a suitable constitutional amendment,  several  categories of  services can be relegated  to  the States and only the main service  can be  subject to service tax.   The   huge collection of  service tax does not  justify  arbitrariness.   Today,  service  tax  is  indiscriminately levied  and  very often results  in  levying  a  tax  on the consideration paid  under a contract even if there is no discernible service.
 
There is also a strong case for ending the controversies of export service.    Similarly, some of the service tax categories result in extra territorial levy of service tax.   If the service has been rendered abroad and has been utilised there, there is no justification for levying service tax merely because the recipient is in India.

Poor implementation of tax laws:

The huge generation of unaccounted money is primarily on account of savage rates of tax, complicated laws and an extremely poor track record of punishing the tax evaders.   Over the years, we have made a mockery of the legal provisions by announcements of voluntary disclosure and samadhan schemes.   Indeed,  the present system is strongly skewed in favour of the tax evader and persons who flagrantly violate the laws are often benefited.  We frequently hear of income tax raids and unearthing of crores of rupees, jewellery and other valuable articles.   If these cases are followed up, it is  seen that there is no prosecution and very often tax payer is able to go to the  Settlement Commission and get away quite easily.   Nothing is more conducive to improve tax collections  than lowering the rates of tax and savagely punishing tax evaders.  Unless there is fear, there will be neither respect of law nor adequate collection of taxes.   Unfortunately, in direct and indirect taxes, a huge burden is borne by  the honest tax payers and tax evaders reap huge benefits.

( The author is a Senior Advocate of the Madras High Court)