While formulating Budget proposals, proper and convincing reasons need to be given if the same are to have legitimacy and acceptability.
With the Finance Bill, 2007 proposals to become law soon, it is time to examine the need for some of the provisions in the Bill and justification given for the same.
Lengthy Bill: The Bill has 84 clauses on direct taxes. Was such a long legislative exercise necessary when, according to the Finance Minister, a new I-T Act is expected to be presented before Parliament shortly? A consolidated view could have been taken regarding such matters too while finalising the new I-T Act. Incorporating the changes proposed in the Bill in the new Act may, besides being time-consuming, will lead to complications because of varying dates prescribed for the applicability of the changes made.
MAT on Section 10A/10B companies: Section 115JB has been made applicable to companies that are eligible for deduction under Sections 10A and 10B. The reason given is that not charging MAT on such companies is contrary to the basic principle that every corporate taxpayer must contribute to the exchequer. That being the philosophy, why were such companies given tax exemption in the first place and why was MAT not made applicable to them for so many years? The other issue in this context is that when tax exemption to such companies is to cease after March 31, 2009, why bring in a provision that will apply only for two years and incorporate it in the new I-T Act only to be operative for a year or so.
Amendment of Section 9 source rule: To offset the Supreme Court's decision in the Ishikawajma-Harima Heavy Industries Ltd case, an Explanation is proposed to be added to Section 9 of the I-T Act to provide that where income is deemed to accrue or arise in India in terms of clauses (v), (vi) & (vii) of sub-section 1 of Section 9, such income shall be included in the total income of non-resident whether or not the non-resident has a residence, place of business or business connection in India.
Apparently, this is a halfway measure because the taxation of non-residents is to be governed by the Double Tax Avoidance Agreements (DTAAs). If the articles of such agreements are more favourable to non-residents, the same, rather than the amended law, will apply. Thus, what is proposed to be achieved by this change is unclear.
Tax benefit under Section 80-IA denied in cases of mergers/amalgamations: Such benefit is proposed to be withdrawn for undertakings/enterprises which are transferred in a scheme of amalgamation/demerger after March 31, 2007. No reasons have been given for the discontinuance of this benefit when, at present, size is important in the context of global competition. Withdrawal of this exemption is apparently ill-timed.
TDS on Savings (Taxable) Bonds 2003: When the bonds were issued, there was no stipulation that the interest payable on such bonds would be liable to TDS. Such bonds would be maturing next year. There does not seem to be any point in subjecting such interest to TDS for one year only. Besides, such a stipulation is a breach of trust by the Government for minor revenue gain.
Increase in the rate of Dividend Distribution Tax: It is proposed to increase DDT from 12.5 per cent to 15 per cent w.e.f. June 1, 2007, on the amount of dividend distributed. The reason given by the Finance Minister in his Budget speech for this is to ensure `vertical equity' and adherence to the principle of `capacity to pay'.
The avowed objectives are lost sight of when surcharge at the rate of 10 per cent is removed for firms and companies with taxable income up to Rs 1 crore while maintaining such a surcharge for individuals and HUFs with incomes over Rs 10 lakh. The Finance Minister has not said why the two avowed principles should be sacrificed for such tax entities.
Further, the reason given for exempting firms and companies from 10 per cent surcharge is the desire that such entities invest and grow. Why this is not applicable for individuals and HUFs is difficult to appreciate.
Cutting down the powers of the Settlement Commission: It is proposed to provide that after May 31, 2007, an application to the Settlement Commission can be made only during the pendency of the proceedings before the assessing officer (AO) and that too in limited situations. Hence, there seems to be no need to have a high-powered body and a huge establishment such as the Settlement Commission in the four metros. A Committee of three Chief Commissioners can be constituted to deal with such cases. This would avoid considerable expenditure and save the time of senior members of the Commission.
The foregoing instances are only illustrative. While formulating Budget proposals, proper and convincing reasons need to be given if the same are to have legitimacy and acceptability. If that is not possible, it is better not to give any reasons at all rather than give unconvincing ones that bring out the casualness in drafting the proposals.
T. N. Pandey (The author is a former chairman of CBDT.)