The Hindu Business Line : Promises best not made

THE new advisor to the Finance Minister, Dr Parthasarathi Shome, has spoken his mind: Tax rates have to be reduced, but correspondingly the existing incentives and exemptions have to be rationalised.

The current tax incentives, according to him, are affecting revenue generation. The income-tax law provides for as many as 207 incentives. Despite major reductions in tax rates in the last few years, tax revenue increases have not been commensurate because of the inability to raise the tax base.

A reduction in tax rates would be possible only if incentives and exemptions are rationalised. Corporate tax in the UK varies between 19 and 30 per cent; it is 30 per cent in Australia and 25 per cent in Brazil. South-East Asia has much lower rates.

The corporate tax rate in India has been at 35 per cent for the past 6-7 years.

It has risen this year because of the surcharge of 2.5 per cent and the educational cess of 2 per cent. The aggregate tax rate thus stands at 36.5 per cent.

This, at a time when tax competition is hotting up across the world, with tax rates coming down.

Dr Shome, Dr Kelkar

One thing in common between Dr Shome and Dr Kelkar is the unanimity of views regarding the need for elimination of tax incentive provisions.

Dr Kelkar was for complete elimination of provisions such as 80IA and 80IB with immediate effect and not through a sunset clause. Despite Dr Kelkar's recommendations, Section 80IA (infrastructure development), 80IB (other industrial undertakings), 10A (undertakings in free trade zones) and 10B (100 per cent export-oriented undertakings) continue in the income-tax code.

Many of the chapter VI A provisions date back to the 1970s and 1980s. Sections 80HHC, 80HHD, 80HHE and 80HHF were diluted with the introduction of sunset clauses.

And even as these sections were eliminated, new provisions, such as Section 80RRB (deduction for royalty on patents), were inserted.

These incentive provisions prevent an objective judgment of the need for a reduction in corporate tax rates.

What stands in the way of removal of these incentive provisions in the altered economic scenario?

Promissory estoppel

To give a more authentic and comprehensive colour to the report on fiscal reforms, the Kelkar Task Force had taken up the issue of whether the elimination of various tax incentives would violate the principle of promissory estoppel.

Nani Palkhivala had sworn by the principle of honouring the word in Parliament. He was aghast when the Government chose to withdraw development rebate. It was Lord Denning who propounded the doctrine in the following words:

"It is a principle of justice and of equity. It comes to this: `When a man by his words or conduct has led another to believe that he can safely act on the faith of them and the other does act on them, he will not be allowed to go back on what he has said or done when it would be unjust or inequitable for him to do so.' Estoppel is thus a rule of equity."

The settled law now is that where the Government makes a promise knowing or intending that it would be acted upon by the promisee and, in fact, the promise, acting in reliance on it, alters its position, the Government would be held bound by the promise and the promise would be enforceable against the Government at the instance of the promisee, notwithstanding that there is no consideration for the promise and the promise is not recorded in the form of contract as required by Article 299 of the Constitution.

The Kelkar Task Force has quoted the Supreme Court ruling in Sharma Transport vs Government of AP (2002 AIR-033 SC) and expressed the view that since the promise to confer the tax benefits under Sections 10A, 10B, 801A and 801B for specified periods is by the legislature, the elimination of these provisions with immediate effect is perfectly legal in view of the various Supreme Court decisions.

It is doubtful if the Kelkar Task Force is correct in relying on certain decisions of the Supreme Court rendered in particular contexts.

A case in point is the ruling in the State of Punjab vs Nestle India Ltd (269 ITR 97 SC) case. The court ruled that the Government is bound by promises made to taxpayers and the Punjab Government was directed to issue notification giving effect to the Chief Minister's promise to abolish purchase tax on milk. Many of the cases relied on by the Task Force were disapproved.

The law on the subject has been restated. One will also have to reckon with the theory of legitimate expectations propounded in Harshad Shantilal Mehta vs Custodian (1998 231 ITR 871 SC).

Thus, in the run-up to the Budget, it will be prudent for government functionaries not to make promises which they may not be able to implement when the Finance Bill is drafted.

Tax reform is a sensitive subject and apart from the vested interests that are likely to be affected, the sensitivities of the judiciary will also have to be taken into account.

(The author is a former chief commissioner of income-tax.)

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