• PAGE ONE
• INDEX
• HOME

The evolution of income-tax _ II

T. N. Pandey

THE taxation policies pursued in India has almost always been progressive, based on the concept of `ability to pay' _ that is, the taxes should be apportioned in accordance with the ability to pay, which is taken to be appropriately measured by income or wealth. The general approach is that as income or wealth rises, it can easily be spared. Therefore, progressive income-tax and other direct taxes have been considered the ideal levies.

The philosophy behind this is based on the `diminishing utility theory' in economics, which states that each additional Rs. 100 or Rs. 1,000 of income provides less satisfaction or has less utility to the recipient in comparison to the equal amount of in come preceding it. Hence, it is taken that higher-income-group taxpayers can afford to pay more tax than those in the lower income bracket. The system has worked well and has ensured both horizontal and vertical equity in taxation.

For quite a while, the tax system differentiated between incomes that were earned by personal effort _ such as salaries and wages, business, profession, and so on _ and unearned incomes _ such as, from property, investments, and so on. Earned incomes wer e given some benefit by way of lower tax vis-a-vis unearned incomes. In principle, this distinction appears reasonable and is still maintained in some countries. However, the distinction no longer exists, and both earned and unearned incomes are taxed at the same rates.

The base for taxation is income. There have been discussions in the past whether `income' is a proper base for taxation. Economists have differed over the exact connotation of the term `income', but there has been agreement that, for tax purposes, income should be so defined to truly reflect all accruals to spending power. Hence, under the Income-Tax (I-T) Act, 1961, the word income has been comprehensively defined, though in an inclusive way.

At one point, changing the tax base from income to expenditure was pondered upon. A study group was constituted in 1985 under the chairmanship of Dr. Raja J. Chelliah to examine, inter alia, the ``desirability of moving towards expenditure wholly or part ly as the base for progressive taxation of individuals and other non-corporate entities, keeping in view the constraints of revenue and base of administration and compliance...''

The study group, after taking into account all aspects of the problem entrusted to it, came to the conclusion that ``an expenditure tax proper would face insurmountable administrative problems and cause great hardship to the average taxpayer.'' It was no t for introducing such a system and, hence, the base for taxation in the country continues to be `income'.

Income-tax was the major direct tax when such taxes were first introduced. Excess profit and business profit taxes were imposed for a short while. However, for furthering the objective of building an egalitarian society, death duty was levied under the E state Duty Act, 1953.

The concept of an integrated system of taxation was mooted by Prof. Nicholas Kaldor in his report submitted to the Government in 1956. Prof. Kaldor recommended the ``broadening of the tax base through the introduction of an annual tax on wealth; the taxa tion of capital gains; a general gift-tax; and a personal expenditure tax.''

For reducing the scope of tax evasion, he suggested the introduction of a comprehensive tax return for all direct taxes and a comprehensive reporting system on all property transferred and other transactions of a capital nature. He also recommended break ing the vicious circle of charging more and more on less and less. He wanted the income-tax rates to be lowered, with the maximum rate at 45 per cent.

The year 1957-58 was a watershed in the history of direct taxes legislation. Major reforms were introduced and a new integrated direct tax structure was put in place. Based on the recommendations of Prof. Nicholas Kaldor, wealth and expenditure taxes wer e levied and, in 1958, gift tax was introduced.

The tax laws were, however, not stringent enough to check adequately tax evasion and avoidance. There was growing realisation of the increasing presence of the parallel economy.

In 1985, a National Institute of Public Finance and Policy report, prepared by Shanker N. Acharya and Associates with contributions by Dr. Raja J. Chelliah, estimated the amount of black income generated in the country in 1983-84 as ranging from Rs. 31,0 00 crores to Rs. 37,000 crores. In 1990, the black money generated per year was estimated at nearly Rs. 40,000 crores. In must have burgeoned since then. Yet, there have been no hard measures to check the growth of black money. Instead, the government ha s been soft on the tax-dodgers _ the voluntary disclosure schemes are a case in point.

The history of tax legislation in India is replete with such schemes, ostensibly to unearth black money. But in effect, these provided an opportunity for the tax-dodgers to convert their black money into white by paying a specified tax on the disclosed i ncome and thereby not having to face penal consequences. A list now of schemes, beginning 1946:

A High currency notes demonetisation in 1946;

A VDS, 1951;

A Sec. 68 of the Finance Act, 1965;

A Sec. 24 of the Finance (No. 2) Act, 1965;

A Taxation Laws (Amendment and Misc.Provisions) Act, 1965;

A VDS, 1976;

A High currency notes demonetisation, 1978;

A Special Bearer Bonds, 1981;

A 1985 Amnesty Scheme;

A Remittance of Foreign Exchange and Investment in Foreign Exchange Bonds (Immunities & Exemptions) Act, 1991;

A Voluntary Deposits (Immunities and Exemptions) Act, 1991;

A Gold Bonds (Immunities and Exemptions) Act, 1993; and

A Voluntary Disclosure of Income Scheme, 1997 (VDIS)

Some of these schemes were challenged in the Supreme Court. By and large, the constitutional validity of such schemes has been upheld by the court. The last scheme, that is, VDIS 1997, was challenged by the All India Federation of Tax Practitioners befor e the Bombay High Court as being violative of Articles 14 and 123 of the Constitution and later before the Supreme Court by way of an SLP (on the High Court holding that there is no constitutional invalidity in the scheme in accepting the position that t here is a parallel economy of unaccounted money and there are persons who have amassed unaccounted wealth to a large extent). The Supreme Court, while dismissing the SLP of the federation, took note of the commitment from the Government's side that, in f uture, it would not resort lightly to amnesty/disclosure schemes favouring dishonest taxpayers as has been done in the past. One hopes that the Government sticks to this commitment.

The instruments for checking/unearthing black incomes/wealth are surveys and search. But these provisions have not been effectively used for checking black money. In the SLP before the Supreme Court, the I-T Department had to give an undertaking that aft er December 31, 1997, it will step up considerably, survey operations under Sec. 133A of the I-T Act and search operations under Sec. 132. However, no visible impact of this assurance has been seen so far.

In the long-term fiscal policy (LTPF) of 1985, it was accepted (in para 1.8) that taxes were being evaded by the better-off sections of society, thus impairing the equity of the tax system. Hence, the LTFP stressed that the taxes levied must be fully col lected and strong action taken to curb evasion. Unfortunately, on both the counts, not much success has been achieved. Even the taxes levied fall in arrears.

With regard to tax recoveries too, the results have not been encouraging. Here also, the Department had to resort to amnesties to collect the taxes levied. The latest amnesty scheme, the `Kar Vivad Samadhan Scheme' (KVSS), was in operation during the per iod September 1, 1998 to December 31, 1998, and later extended up to January 31, 1999. The object of the scheme was to collect arrears of tax determined on or before March 31, 1998. The scheme applied to tax arrears covering 37 enactments under direct an d indirect taxes. The concessional rates and the concomitant waiver of interest and/or penalty was meant to induce the taxpayers to pay up. Even prosecution was waived. In spite of such concessions, the scheme did not evoke much response, roping in a mer e Rs. 2,000 crores.

One aspect of the I-T policy followed hitherto has been the absence of long-term planning. This is clear from the observations made in para 1.9 of the LTFP:

``Our present tax structure has evolved over many years in response to the felt needs and exigencies of the past. Short-term requirements and administrative constraints have contributed to the evolution of a complex tax system. The time is ripe for us to take a hard look at our structure of taxes and assess the directions in which we must move forward with reforms to further our basic objectives of growth and social justice. In particular, policy must support the rapid expansion of productive employment in our economy. We must also ensure that tax reform does not lead to significant revenue loss, since the revenues are necessary to finance essential Government expenditure in a non-inflationary way. Finally, having decided on the directions for reform, we must control the pace of implementation to take account of possible dislocations to the existing structure of production, which has evolved in response to past economic policies.''

In spite of this position, there was only one concerted effort to plan the tax system in a regulated way by formulating a LTFP for five years which, inter alia, included a chapter on direct taxes. The LTFP was conceived while formulating the Budget for 1 985-86.

In the last Budget, the Finance Minister had made a commitment to move towards a long-term fiscal policy co-terminus with the Plan:

``The formulation of a Budget is an annual exercise, but to be meaningful, it has to be set in a longer timeframe. Our fiscal system has served us well. However, over the years, objective conditions have changed calling for new responses. I am quite awar e that it is not possible to usher in all the changes at one stroke, yet we have to initiate a process of reform which can be completed in a phased manner in a time-bound frame. We will be moving towards the formulation of a long term fiscal policy co-te rminus with the Plan.''

The LTFP lapsed in 1990 and there had been no attempt to frame another one. In fact, there is definite reluctance to do so.

(To be concluded)