There has been a record collection of income-tax this fiscal, and the lion's share of it no prizes for guessing right - has come from the Indian corporate sector on the back of the 9 per cent growth rate the economy has registered as well as due to the rather myopic and inequitable perception of viewing it as a single-point tax collection centre, if one may say so, if not as a milch cow.
Apart from the 33.66 per cent corporate tax, it also pays fringe benefit tax (FBT) at the same rate on 20 per cent to 50 per cent of quite a few business expenses, which in Parliament's perception have a personal flavour. And when it is time for payment of cash dividend to the shareholders, the taxman plonks himself to demand his pound of flesh -- distribution tax of 12.5 per cent plus.
The decadent practice of collecting distribution tax from corporates in lieu of taxing the shareholders on dividend received by them started in 1997 ironically allows the problem of double taxation which it purportedly wanted to solve to fester what with the corporates now being doubly taxed to the extent of dividend distributed. The resounding success from the Revenue standpoint of the distribution tax regime mainly on account of ease-of-collection factor emboldened the Finance Minister to once again train his guns on the sitting ducks, read corporates, and introduce FBT.
Curiously, the Finance Minister did not prefer the more equitable and challenging option of asking the assessing officers to examine expenses with a fine tooth-comb with a view to disallowing the personal expenses camouflaged as business expenses. If the distribution tax extracts a vicarious price from all the shareholders irrespective of their income levels, the FBT calls upon even those companies whose balance sheets are splotched in red to pay this impost. The final nail in the corporate coffin of course is the invidious Minimum Alternative Tax (MAT) which calls upon companies to pay 7.5 per cent plus tax on their book profits should the tax on their taxable income work out to be lesser. Let us not kill the goose that lays golden eggs like Germany once did by taxing its corporates almost to destruction.
Frenetic activity is being witnessed in our bourses. Yet, players therein have been left severely alone but for the STT, which is just a slap on their wrists. That the STT keeps the government's cash register ringing is no ground for not taxing fully on par with the salaried class the investors raking in the moolah. And letting off the movers and shakers of the share market, the foreign institutional investors (FIIs) are a blunder of Himalayan proportions. The Finance Minister has gone on record calling them dealers in shares and thus assessable to tax for profits and gains from business but only if they have a permanent establishment in India. The Authority for Advance Ruling has thought otherwise in quite a few cases by calling them investors, thus echoing the Income-tax Act that contains a special chapter for taxing them. The truth, however, is at the end of the day, none of them pays income tax in India.
The Mauritius route comes handy for the investor bandwagon what with the Double Taxation Avoidance Agreement (DTAA) with that country empowering Mauritius to pull a fast one on India --- there is no capital gains tax in that country and they are out of bounds for the Indian government. Did you say dog in the manger policy? Yes, it is precisely that. But technically, what the FIIs earn in India is business income. And income earned in India must bear tax in India even if it calls for amending the DTAA with the USA and other countries. To say that this would scare the FIIs away is chimerical to say the least --- hefty return on investment is what beckons them which would remain hefty even after being subjected to tax in India.
The various presumptive taxation schemes targeting the retailers, truckers and contractors who dot our landscape have been a butt of joke what with the schemes coming a cropper in the absence of proper enforcement. Truckers, who took the government head on when service tax was introduced and successfully deflected the tax on to the users of trucks, have largely remained impervious to the presumptive income tax as well. It is time the government went for their jugular by going for the unorthodox method of collecting tax --- insisting on tax stickers a la pollution stickers.
The government cannot preen smugly at the record tax collections. For, the other object of taxation, equity, has largely eluded it. To be sure, it has laid traps like annual information return by mutual funds and property registration authorities and Banking Cash Transactions Tax (BCTT) for tax evaders but they are only as effective as mousetraps in dingy households.
S. Murlidharan (The author is a Delhi-based Chartered Accountant)