The Hindu Business Line : Why Budget needs a fair face

THE basic ingredient of a good tax system is honest pursuit of tax policies, especially in the realm of personal taxation. An ideal personal income-tax is one in which tax burdens are evenly apportioned amongst taxpayers. Unfortunately, this important policy is disregarded at the time of Budget-making, where revenue realisations become the predominant concern. A case in point is last year's Finance Act.

While presenting the Budget for 2003-04, the Finance Minister, Mr Jaswant Singh, observed in his Budget speech:

"Rates of income-tax, both corporate and non-corporate, have remained largely stable in 1997. As stability and continuity are commended as virtues in tax regimes, I intend to be virtuous. Corporate tax structure will, therefore, be left as it is; except that the 5 per cent surcharge, levied last year in connection with the security of India, will be halved in the case of corporate assessees, firms, foreign companies, cooperatives, and local authorities.

"In the case of individuals, Hindu undivided families (HUFs), association of persons, and so on, this surcharge will be removed entirely, except in the case of those earning an income above Rs 8.5 lakh. From them, that is, those earning above Rs 8.5 lakh, I will collect a 10 per cent surcharge on the tax, which works out to less than 3 paise out of an income of a rupee. But I have provided some relief to them as well, for example, in standard deduction."

This raises some policy issues:

Should surcharge be a permanent feature in the Indian taxation system? Obviously, the reply has to be in the negative and this was accepted in the Long Term Fiscal Policy of 1985, which stated thus:

"Under certain compelling circumstances, such as external emergency, it may be necessary to mobilise external revenue through taxation. In such an extraordinary situation, the Government will take recourse to levying a surcharge on income-tax and other taxes, as necessary, without disturbing the basic rate structure. Any surcharge will be a temporary measure and phased out over a period of time."

Rather than follow this solemn policy, surcharge has now become a permanent feature in India's tax system even without there being any extraordinary situations. `Security of India' cannot be considered as an extraordinary situation. It has to be taken care of on a constant basis.

That being so, why not increase the rates of tax rather than allow Finance Ministers tinker with the rate each year, the justification handed out being that in the matter of tax rates, the `virtuous' attributes of `stability' and `continuity' are being pursued. The issue is: Whom are we fooling?

Why should higher incomes be subjected to higher surcharge (by increasing it by 100 per cent) only with respect to some categories of taxpayers?

It is, per se, discriminatory to double the surcharge for individuals, HUFs and AOPs above certain income levels and halve it for artificial persons such as corporations, the incomes of which fall in the unearned income category. This belies logic and is in clear disregard of the principle of `ability to pay'.

Why give misleading reasons to justify increases in surcharge?

In increasing the surcharge for individuals with income exceeding Rs 8.50 lakh, the Finance Minister, said: "I have provided some relief to them, as well, for example, in standard deduction."

This hardly justifies the extra burden on this section of taxpayers that earn higher income by putting in more labour and by efficient functioning.

The benefit to a taxpayer (who is a salaried employee) by way of standard deduction would be only Rs 6,000 on a deduction of Rs 20,000. But if his income is, say, Rs 10 lakh, after using the tax benefit on account of standard deduction, he will have to pay extra tax of Rs 21,800 by way of surcharge.

A non-salary assessee's tax burden will increase by Rs 1,27,400. Thus, imposing a surcharge of 10 per cent on the earned income of such individuals is hardly justifiable.

Why should earning more be a disqualification for taxation? Section 88 disqualifies individuals/HUFs with higher incomes from rebate on life insurance premiums, contributions to provident funds, and so on, w.e.f. April 1, 2003, as follows:

Income of up to Rs 1,50,000 — 20 per cent rebate

Rs 1,50,001 to Rs 5,00,000 — 15 per cent

Above Rs 5,00,000 — Nil

The basic objective of tax rebate is to encourage investments in certain desired areas. Then why disqualify persons with higher income from such rebate?

The desire to pay tax is largely influenced by the fairness of the tax administration.

If taxpayers find that the policies pursued are arbitrary, unfair and irrational, based on whims and fancies, the desire for voluntary compliance gets dampened.

On the contrary, tax evasion/avoidance tools become preferred, influencing compliance in the process.

While such policies may give short-term benefits, they militate against a strong and progressive tax regime and also erode the Government's credibility.

Hence, there is a need to correct the aberrations at least during the Budget exercise for 2004-05.

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