The Hindu Business Line : Miles to go and promises to keep

ACCORDING to Justice Holmes of the US Supreme Court, income-tax is the price for buying civilisation. However, this basic objective often gets sidetracked when elections approach. During electioneering, the government in power promises sops such as tax cuts, raising the exemption limits, and so on.

In the ensuing elections, such promises have come well in advance. The first set of announcements was made on January 12, 2004, when the Finance Ministry, Mr Jaswant Singh, issued notifications promising, among other things, the following sops for taxpayers:

i) one-by-six scheme not applicable to pensioners;

ii) salaried employees with income up to Rs 1.5 lakh and having no other sources of income and in whose cases tax has been deducted at source, not required to file returns; and

iii) the rates of interest for valuation of perquisites concerning employer-sponsored loans would be reduced.

And in the Interim Budget of February 3, 2004, more concessions were announced. Obviously, the Finance Minister could not announce changes that required amendments to the direct taxes legislation. Hence, he has made certain promises that would be honoured if the Government is voted back to power. These relate to:

Extension of fiscal benefits to new projects in the power sector from 2006 to 2012, and also make available this sop to cases of takeover from State electricity boards.

Changing the system of taxing shipping companies from corporation tax to tonnage tax.

Capital gain accruing to farmers on acquisition of their lands by the government shall be exempt from tax. There would also be no deduction of tax at source on the interest earned on enhanced compensation for acquisition of such lands.

Extending the exemption of capital gains from tax on disposal of listed equities acquired on or after March 1, 2003, but before February 28, 2004, for a further period of three years "to provide stability."

This raises the issue of why it was initially given only for one year.

Tax treatment of family pension and incomes of war widows would be reviewed. Standard deduction of the salaried class, which the Finance Minister seems to have suddenly realised "has the best track record of income-tax compliance," is to be reviewed as well.

Business processing outsourcing (BPO) which is ancillary and auxiliary in nature and where adequate remuneration is paid to the Indian call centre, would not involve any tax liability for the outsourcing foreign unit.

Not happy with these, the Finance Minister, on February 4, announced a concession for mutual funds, exempting them from dividend distribution tax for one more year.

These clearly show that barring the announcements on listed equities and mutual funds, the others were not urgent and could have been considered at the time of presenting the regular Budget. Obviously, the promises have been made keeping in view the elections.

Such promises on the tax front are not new, though. In the 1999 elections, a spokesman and a candidate of a political party declared that if their party were voted to power, the exemption limit for income-tax would be raised from Rs 50,000 to Rs 1,00,000. Such pronouncements make one think whether politicisation of direct taxes is economically, socially and ethically justified.

Off-the-cuff remarks do not bring credibility to the persons/parties making them. In a democracy, the Government must give reasons for the tax proposals made. These must, at the very least, express some universal good that transcends narrow political gains.

The proponents of such proposals merely look at the immediate and short-term impact of their pronouncements. They forget that besides raising revenue for the government, taxes have many other roles to play. As a factor affecting the pricing of goods, they determine what to produce, where to produce and in what measure. By taxing the affluent more, they change the distribution of income and wealth — this would take a long timeframe, though.

If fiscal policies are to be responsive to current problems, they should, inter alia, be so formulated as to result in better allocation of resources, encourage or discourage certain kinds of economic and social behaviour, stimulate or stabilise economic growth, help solve specific problems such as elimination of pollution and shortage of accommodation, encourage family planning and development of backward areas, and so on. Tax legislation, thus, has to be a dynamic process.

Promising tax concessions that are unrelated to economic realities merely for political mileage would harm the economy and ultimately the people.

The votaries of across-the-board benefits in income taxation ignore the fact that by promising tax concessions to all and sundry, the basic ideology of a tax system is destroyed — that is, the ability to pay and equity.

Ability to pay requires that taxes be apportioned in accordance with the capacity to bear the tax.

And this is done by measuring income/wealth based on the theory of diminishing returns. Raising the exemption limit to Rs 1,00,000 would mean that similar advantage would be gained by persons who are in different income brackets, say, Rs 2,00,000 or Rs 20,00,000. This, on the face of it, is unfair, iniquitous and goes against the principle of progressiveness in taxation.

Further, it would shrink the tax base substantially, which would be contrary to the principle of comprehensive coverage of taxpayers and go against the declared policy of increasing the number of taxpayers which, at present, is still very low.

Despite experience at their command, tax policymakers have not been able to devise a totally sound system. Designing a tax system is the job of fiscal experts and it would be better if it is left to them and not exploited for gaining electoral advantage.

Hence, during electioneering, no tax promises should be made which either cannot be fulfilled or, if implemented, would cause immense damage to the fiscal system.

Promising tax inducements, prima facie, seems unethical. The Election Commission would like to consider whether this matter can be covered by its guidelines.