MARCH 05, 2012

Union Budget 2012: Dump DTC; Abolish DRP; Make key administrative changes

By Arvind P. Datar, Sr Advocate

THE Union Budget for 2012-13 is going to be watched with great anticipation. The nation is in a severe financial crisis and the outlook is not promising either domestically or internationally. The Finance Minister remarked that he was losing sleep over subsidies not reaching their target audience. While one Minister was losing sleep, the rest of the Cabinet has apparently gone up to sleep over various important issues. It is now beyond dispute that there has been a paralysis of decision taking in various sectors. The economic crisis is largely of our own making and of simply living beyond our means.

In this background, what are the important changes that should be made in the budget? My suggestions would be as follows:-

1. Dump the Direct Taxes Code:

It is fortunate that the Direct Taxes Code is not being introduced this year. In my view, it should not be introduced at all. This Code will only complicate the complicated nature of income tax. The Code has the objective of simplifying the law but does exactly the opposite. It has far more sections and schedules than the present Income Tax Act. There is now a unanimous view that the Direct Taxes Code is a more complex version of the present Income Tax Act. There is bound to be an enormous loss of time in making minute comparisons between statutory provisions between the two enactments and the amount of litigation will only increase several times.

2. Abolish Minimum Alternate Tax (MAT) on Special Economic Zones (SEZ):

One of the incentives given to Special Economic Zones was the exemption from income tax and indirect taxes. It is a matter of shame that the Finance Ministry has levied Minimum Alternate Tax last year. The worst thing that can happen is for a Government to break its promise. This has a severe psychological impact and generates contempt for the law. Further, the imposition of MAT is bound to cause severe economic hardship to assessees as this tax cannot be passed on to the clients or customers of a unit in the SEZ. The levy of MAT also upsets the financial planning of several assessees.

3. Clarify stand on charitable trust:

Section 2(15) defines a charitable trust and the proviso which was added in 2008 was intended to deny the benefit to charitable trusts which was carrying on business. This proviso has created serious hardship even for genuine charitable trusts and has led to proceedings instituted against hundreds of trust. It is necessary to clarify that the amendment will apply only to trusts that are carrying on business and not applying the proceeds for charitable purpose.

4. Abolish Dispute Resolution Panel (DRP):

After the introduction of transfer pricing, a Dispute Resolution Panel consisting of three Commissioners was set up on the ground that this panel would deliver faster and more equitable decisions on transfer pricing issues. In practice, it is found that the DRP has miserably failed and, in a vast majority of cases, the draft assessment order is blindly confirmed. No purpose has been achieved by constituting the DRP. It is better to abolish it and allow the normal appellate procedure even for transfer pricing cases.

5. Permit donations to political parties:

The major source of black money arises from the need to fund elections. It is necessary to have a transparent accounting system for all political parties. It is better to permit donations to political parties and allow them as a deduction. The accounts of various political parties should also be subject to strict auditing.

6. Appeal against rulings of the AAR:

One controversy is whether the decision of the Authority for Advance Rulings (AAR) is subject to further appeal or revision. At present, a special leave petition is being filed directly to the Supreme Court. There is a doubt as to whether the decision of the AAR can be challenged in any court. It is suggested that decisions of the Authority for Advance Rulings can be subject to one appeal to the Supreme Court. This will allow correction.

7. Administrative charges:

The above are some of the legislative changes that can be made to the Income Tax Act, 1961. There is also a need for major changes in the manner in which the Act is administered. The manner in which vast powers conferred on the authorities are grossly abused is deeply disconcerting. One example is the indiscriminate manner in which the assessments are reopened under Sections 147 and 148. In several cases, benefits that have been granted are sought to be taken away by misusing the powers under Section 148. Further astronomical demands are made leading to severe hardship to the assessees. There is no accountability or any kind of check on such demands. In fact, the recent announcement of rewarding large claims will go a long way in further absurd demands being made.

Another dangerous trend is the refusal to follow High Court and Tribunal decisions that are against the revenue. Recently, it was found that the Dispute Resolution Panel refused to follow direct decisions of the Tribunal and the High Court on the ground that they had not become final. It should be made clear that unless a decision of the Tribunal has been stayed by the superior courts, it should be followed whether it is for or against the assessee.

8. Urgent course correction necessary:

The Budget can be an important instrument in setting the direction of the nation's future. The destiny of the country is, in a sense, determined by the accumulation of the decisions that are made in each financial year. We are on the brink of a serious economic crisis because of refusing to follow the simple laws of economics. One cannot distribute money unless it is earned and there is surplus. The NREGA Scheme and various other schemes have ruined the economy. Years of experience have shown that subsidies are always misused and have never been the solution for our economic or social problems. The drastic consequences of granting free power and various other benefits has crippled the economy and made it very vulnerable to any international crisis. It is not clear as to how long the oil companies will be able to sustain the losses that are being made. Converting these losses into bonds is no solution. Similarly, no attempt is made to check the misuse of the subsidies. The dissatisfaction of the people is sought to be relieved by some more subsidies and some more benefits, leading the country into a downward spiral.

Conclusion:

The Finance Minister has the duty of making bold, sweeping changes to steer the nation and restore it to good health. If he presents a routine Budget, the economic crisis would only worsen. Never has it been more necessary to believe in miracles and pray for change.

(The author is a senior advocate of the Madras High Court.)