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Withdrawal of I-T exemptions : The nauseating earnestness!

By Shiva Kant Jha

THE Central Board of Direct Taxes has called for comments from the members of public on the propriety of the removal or continuance of the various exemptions and deductions allowed under the Income-tax Act, 1961 in computing taxable income. The ostensible reasons, as stated by the CBDT, are simplification of the tax laws, minimization of the distortions within the tax structure, and the broadening of the tax base. Such embellished reasons have been found so often false over the years that they seldom ring true.

A close examination of the structure of the Income-tax Act would show that did not adopt the protocol so simplistic as to be stated in a single sentence viz: Income-tax shall be levied, as per the rates prescribed in   the appended schedule, by the officers of the Central Government in accordance with the rules of business framed by the Central Board of Direct Taxes. This sort of law would tax an assessee's real income after allowing all the essential outgoings from gross receipts. The quantum of real income to be taxed would, thus, be determined in the light of   certain well-known principles already declared by the Privy Council, and the Supreme Court in many leading cases.

But we have adopted a complex structure for the Act as various socio-economic policies are sought to be promoted by the provisions of this Act. The complexity in the provisions is caused by the diversity of the policy considerations and constraints, and by a legitimate concern to frustrate their misuse by crooks of all hues. The approach is conditioned and controlled by our constitutional perception of the role of the State.

It is felt that the commission to examine allowable exemptions/ deductions deserve to be   entrusted to the Law Commission of India which had provided the report on which this Act is founded. This sort of study would require a comprehensive and critical study of the provisions right from the moment of the formation of their policy quotients. The authorities of the Income-tax Department, and their advisors, most of them being ignoble lobbyists, do not possess mental infrastructure to undertake an exercise of this magnitude. No body should expect the members   of public to do this gratis when they know that their comments are not going to matter.

As it is not possible to examine all the exemptions/ deductions individually, some broad comments are made by subsuming them in different groups:

++ Usurpers cannot be decision-makers: Agriculture is exempted from taxation under Section 10 of the Act. It is obviously tautological as 'agricultural income' does not come under the Central Government's legislative power. Hence,   it can never be within the scope of the Act. Taxing 'agricultural income' is a complex issue which this author has examined in a separate article entitled "Intrigues in the cockpit".

++ Some deductions, as those relating to the grant of Depreciation, have to be allowed to arrive at real income. The quantum of depreciation (and its rates)   is, of course, a matter of pragmatic decision. It involves not only the rate of obsolescence in our fast-changing technological society, but also the governmental policies in the matter of economic growth in differing segments. Grant of Deprecation is not a mere accounting exercise. Vance Packard, in his book The Waste Makers , has drawn an account of planned obsolescence on account of deliberately manipulated tastes and fast technology. Let things move in inertia till we discover better reasons to change them.

++ Some deductions/exemptions illustrate the State practice recognize under Public International law. Whilst the income of a foreign sovereign is nontaxable, his income from commerce is taxable. Technically the EEC and SAARC are not foreign States recognized under Public International Law, but now they share similar diplomatic immunities. They are to be taxed only on their commerce within our domestic jurisdiction. The provisions of 10(6)(ii), 10(6BB),10(23BBA) and 10(23BBB) are trying to come to terms with this position based on a measure of international understanding. We must know the doing away with them   we may   gain something but   we are sure to lose no less as a matter of consequence. Law on the point is stated with precision in     Trendtex   Trading Corpn v Central Bank of   Nigeria [1977] QB 529, [1977] I All ER   881.

++ Most of the provisions pertaining to exemptions and deductions are such that any tinkering with them would be merely Brownian Motion. What is the fun in doing away with such exemptions/deductions which make us incur more expenditure in some form bringing our exercise to square one?   If we deny, or reduce, the grant of deductions/exemptions to our foreign collaborators and their employees, we shall have to placate them in a different way as in such matters we are often not the choosers. Some of such deductions/exemptions, if denied, would lead to cost escalation. One would be baffled to find our government denying such benefits when it has no compunction in bringing the tax law to a vanishing point while bequeathing benefits through the double Taxation Avoidance Agreements. We know how   the foreign buyers and bidders (as illustrated by the deal whereby the Delhi and Mumbai Airports have been privatized) get their terms and conditions accepted.

++ Why should our government think of doing away with the petty benefits given to public servants, employees, and retired and retiring lots in this State which is yet to announce publicly that the idea of welfare is dead, and the idea of socialism has lost all meaning. It does not behove well even to fondle with such ideas when the concentration of wealth is fast increasing, and the market economy is crating social pathology by mind-boggling pay packets. Think of the looters operating from tax havens. Forget for the present our suffering brethren. Haven't we had enough of melodrama in our   economic management.

++ We have already done enough to destroy the institution of the HUF, let us not do away with the exemption on the a amount received out of family income, or in case of impartible estate, amount received out of income of family estate. Let us not create more social   problems. Insufficient fund was made available to the victims of the Bhopal Gas Leak Disaster, why think of depleting that by denying exemption? Why should we knit our brow in granting exemption from taxation to the grant of scholarships, when there is a case for doing much more for the students? We have already betrayed many of our commitments made during our Struggle for Freedom. Why should we put Khadi or village industries in jeopardy? Why should we provide the final nail in their   coffin? Should it be done   merely because the gluttonous corporations want their demise? Why should incentives be removed on donations for public weal given to   the authorities whose credentials are beyond doubt?

++ Many incentives are provided to develop certain industries, or certain regions. The policy considerations outweigh tax considerations. A committee of experts will have done a fine balancing of competing interests. The exemption under Sections 10 (15A) and 80-IA come in this category. In view of Art. 265 of the Constitution such policy considerations must have statutory foundation.

But this author would suggest that the following exemptions/ deductions should go. It is not possible to exfoliate reasons in detail, but they would just be touched to provoke thinking:

++ No exemption to a charity be granted, because charities are misused on the massive scale. A charitable trust, registered under the Societies Registration Act, turns into a company for the benefit of a coterie of persons. Bribes are often given by way of grant of hefty scholarships from the resources of charitable Trusts. It is time to think about these. Rigorous rules be framed, and a close monitoring needs is done to prevent misuse.

(ii) Why should so much benefits be showered on the offshore banking units, the financial services centres in a Special Economic Zones, and other ventures   in the Special Economic Zones? Why should we grant a morbid form of zamindari to the corporations? Let us learn lessons from history. It is a matter of national shame that under some mischievous persuasion we have allowed a handful of persons with root outside to be above all law? This has happened because we are a Sponsored State. Do away with Secions 80LA, 115JB, and 115-O of the Act.

(iii) It is good idea to tax all the gains of our Members of Parliament:   first they should lead the way. But they must not   be allowed offset such losses by resorting to new gains, which they can rake in the easiest of all manners. The evil nexus   between the wielders of power and the bureaucrats, which The Shah Commission Report had found out, has become worse.

We share the government's concern for gathering more   resources. Constraints of space restrain me from going in detail. But only a few suggestions are made for persons much abler than me to reflect pro bono publico :

++ Do away with the present-day model of tax treaties which constitutes an opaque system for the benefit of those who earn by most unscrupulous methods: through bribery, receipt of kick-backs, drug-trafficking, insider trading, embezzlement, computer fraud, under invoicing-over invoicing, and other tainted activities spawning scams having deep lethal consequences for the welfare of common people.

(b) Keep an effective check on our rogue financial system where   billions can flow in or out of an economy in seconds. The corporations rule, and the stock market has best of times. Not less than one-third of the World GDP is stashed in the tax havens. The speculators thrive on extractive investments. Hence, there is a good case for taxing capital gains. Why should we give concessions worth Rs 90,000 Cr to the corporate world. Prof Arun Kumar of the JNU concludes: ": ...black economy is at least 40% of GDP and the government is losing at last Rs. 4.5 lakh crores of taxes ". Tap these sources.

(c) There should be transparency in our system. Let full effect be given to U.N. Convention against Corruption, and also to the provisions as to transparency mandated even under the Uruguay Round Final Act. If transparency is ensure, most of our blemishes would go.

If we cannot do the above, we may, perish the thought, go in for a morbid option:

(a) Give full effect to Adam Smith's role of government narrowed to act merely as the protector and facilitator of the neo-capitalists believing in, as Gailbraith says,:

  tax reduction to the better off,

  welfare cuts to the worse off

  small, 'manageable wars' to maintain the unifying force of a common enemy, the idea of 'unmitigated laissez-faire as embodiment of freedom', and

  a desire for a cutback in government.

(b) The government may break new grounds for resourced by granting lands to the corporate zamindars, by granting right to exploit our resources by conferring licenses and franchises. If in the process water resources are exhausted, riverbeds can be leased or auctioned. When all these are exhausted, human beings, now fast becoming commodities (see David Riesman's The Lonely Crowd ), can be sold in international market. Thus   we can have enough funds to run our show, and   also enough scope to obtain   hefty kickbacks.

(c) Much burden can be shed off by outsourcing to tax havens and other foreign lands the functions, which our executive, legislature and judiciary perform. We would enjoy, in such bad days, our slavery of the type the slaves enjoy by the force of habit even after their freedom just because they never learnt to remain free. If this happens we would have a sub-government implementing the sub-text of the corporate masters.

These are some of the flash ideas. None would be happier than me to see that such things, as stated at (a) to (c ), do not ever happen. But we know that we reap only the consequences of what we do, not the fruits of miracles.

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