The Hindu Business Line : Discrimination in levy of surcharge

Currently, companies/firms (without any limit) and individuals/HUFs with income exceeding Rs 10 lakh are required to pay surcharge at 10 per cent of income-tax payable. Surprisingly, while presenting the Budget for 2007-2008, the Finance Minister has discriminated between these categories of taxpayers.

In paragraph 163 of the Budget speech, he said "... . In order to encourage small and medium enterprises to invest and grow, I propose to remove the surcharge on income-tax on all firms and companies with a taxable income of Rs 1 crore or less. This will benefit about 12,00,000 firms and companies".

This is despite the fact that in paragraph 162 of the speech, he has, while speaking about personal income-tax, acknowledged "cooperation they (individuals) have extended to the Department of Revenue".

Discriminatory

The decision is prima facie discriminatory and unfair. An artificial legal person like a company cannot be given preference over a living being like an individual in the matter of levy of surcharge. If at all the choice of giving favoured treatment arises, it has to be to human being (individual) who has to be preferred over the company. The reason for this is quite obvious.

Most of the individuals in business or profession toil personally to earn the incomes while such personal involvement is missing in the case of companies.

Also, in the case of companies, the plant and machinery used for earning income is given hefty depreciation, 25-100 per cent of the value, which is deductible in computation of taxable incomes. But no depreciation is given to individual taxpayers; labour productivity too depreciates as the years roll on. Giving preference to companies in taxation vis-à-vis individuals is highly unfair.

Long back, distinction was made in the matter of taxing `earned' and `unearned' incomes. The former, such as salaries and business, generated through human effort were taxed at lower rates in comparison to unearned incomes such as interest, dividends, rent, etc. Though there is no such distinction any longer, the spirit underlying such distinction is still valid.

Hence, while equating personal and company taxpayers is bad enough, giving preference to companies over individuals is worse.

Dividend tax

In paragraph 176 of the Budget speech, while justifying the increase in dividend distribution tax, the Finance Minister said: "I believe that my direct tax proposals have brought about more horizontal equity. It is also necessary to improve vertical equity. Having regard to the capacity to pay, I propose to raise the rate of dividend distribution tax from 12.5 per cent to 15 per cent on dividends distributed by companies."

This is far from the truth if seen in the background of the discrimination practised in the levy of surcharge on individuals and companies. In the context, the following questions crop up:

Who has better capacity to pay, an assessee with an income of Rs 1 crore or an individual assessee with an income exceeding Rs 10 lakh?

In whose case vertical equity is ensured better — exempting the assessee whose income is Rs 1 crore from surcharge or taxing an assessee whose income exceeds Rs 10 lakh?

The Finance Minister owes an explanation on these two counts to the crores of individual taxpayers whose cooperation with the tax department he himself has acknowledged in paragraph 162 of the Budget speech.

Equity in taxation has to be ensured for all categories of taxpayers if voluntary compliance is the goal.

(The author is a former chairman of CBDT.)