In the recent past one would have been flooded with information highlighting the buoyancy in the tax collections. This would then raise the question: Would removal and/or reduction in some of the taxes levied be justified? However, belying the buoyancy, the collections of some of the taxes may not justify they being imposed, especially considering the time involved in their administration and collection.
The Finance Minister, Mr P. Chidambaram, in his seventh Budget to Parliament has continued with approach of nullifying the judicial interpretation placed on the laws drafted and passed.
The Finance Act, 2005, ostensibly to curb and detect black money, levied a Banking Cash Transaction Tax (BCTT) at 0.1 per cent in respect of the amount of cash withdrawn on a single day in excess of the specified limits.
The Reserve Bank of India has, in its endeavour to bring discipline in the banking system, introduced Know your customer norms which each bank is required to comply with. Knowledge of the details of the customer would to a large extent fulfil the objective.
Further, it was felt that the amount of resources deployed and spent by both the Government and the banking sector, may far exceed the tax collected or the additional tax on account of the detection. Considering the demand made, the Finance Minister has moved a proposal to withdraw the levy of BCTT charged in respect of any taxable banking transaction entered into after April 1, 2009.
Further, Dividend Distribution Tax (DDT) is levied on the dividends declared by companies. The rate has over a period seen an increase from 10 per cent to 15 per cent plus surcharge and education cess. When compared to partnerships, no such tax is payable in respect of the income distributed to the partners.
Hence, in the case of companies, the effective tax rate, that is, the corporate tax rate and the DDT, payable by companies turns to a disadvantage for carrying on business as a company.
Considering that it may not be possible to completely abolish the levy of DDT, the Finance Bill provides for some solace to companies having subsidiaries, which are in receipt of profits in the form of dividends from such subsidiaries, by subjecting dividend distributed by such subsidiaries to their parent to tax only once, that is, in the hands of the subsidiaries, and relieving the parent from the payment of DDT on the same profits again (subject to the fulfilment of the conditions prescribed).
Fringe Benefit Tax
The Finance Act 2005 also had another surprise in terms of the levy of Fringe Benefit Tax (FBT) on benefits deemed to have been extended to employees on a collective basis. This would be payable by a specified employer, which covered practically all employers. Amidst the euphoric claim to withdraw the levy, the Government last year introduced the levy of FBT on the stock options thus indicating its intention to continue with the taxation.
It may be stated that in a number of cases on which the FBT is levied, there may be no benefit being extended to the employee and, hence, the levy of tax thereon may be considered as going against the principle of equity. Further, such tax is an additional tax liability on the employer.
The Finance Minister has proposed to continue with the provisions without providing for any major relief except for a small tinkering. It may be observed from the Table that though it may be justifiable to continue with the taxation on account of their contribution to the total tax collected, this has really to be weighed in the light of the difference in the tax collection between the taxes collected when the perquisites were being taxed in the hands of the employee as against the levy of FBT, which may be very marginal. Further, such tax is levied by a very few countries and needs to be reviewed in respect of its continuance.
Minimum Alternative Tax (MAT) provisions have been seeing continuous modifications. The latest is the levy of tax on capital gains where such gain could be exempt on account of having made the investments in the specified securities, etc.
Further, capital gains in respect of securities on which STT has been paid, MAT-paying companies may be at a disadvantage. This would be especially so when compared to normal tax-paying companies, which would be covered by the STT regime, there would be no additional tax payable by such companies.
While MAT tax credit would be available, due to timing difference, it would be considered as discriminatory and against the principle of equity. The Finance Minister has ostensibly introduced provisions not to allow certain taxes as a deduction in computing the book profits and, hence, continuing with the policy of increasing the cost of operations.
The Finance Bill has not proposed too many changes in the direct tax provisions. However, of the changes proposed, one would notice that it has sought to nullify at least eight judicial interpretations which were rendered in favour of the taxpayer, through retrospective amendments to the relevant provisions. Though, this may not be considered as bad taxes, but one could consider it a bad tax policy. It may be appreciated that considering that litigation in India is a long-drawn process, an issue which could be decided by the highest judiciary would be nullified by a retrospective amendment. This could affect a number of taxpayers and unsettle the process of carrying out business in India.
While the Finance Minister has addressed some of the issues giving rise to bad taxes, attempting to provide respite to the taxpayers, there is certainly room for further revision/changes. Considering the above from the economic, operational and equity aspects, a lot is still desired in relation to FBT and MAT provisions.
Girish Mistry Pallavi Talavlikar (The authors are Executive Director and Assistant Manager, respectively, PricewaterhouseCoopers.)