The Hindu Business Line : An over-used exception

While presenting the Budgets, Finance Ministers have been taking credit for maintaining stable income-tax rates and brackets but have been subjecting the taxpayers to higher tax through surcharges and cesses, which have the same impact as increased tax rates. And this is being done on a regular basis.

Surcharge

Surcharge on income-tax is not a new feature. Such levies have been imposed in the past also as a short-term measure. In the 1980s, surcharge was imposed as a drought-relief measure.

Surcharge was, therefore, levied for specific purposes and not as a normal revenue-generating measure. However, since the past few years, this has become a normal feature in every Finance Act.

The concept

The Long Term Fiscal Policy (LTFP) was pronounced in 1985-86 and contained, inter alia, a policy with regard to direct taxes too.

In the LTFP, the levy of surcharge in the context of personal income-tax rates was also outlined. Paragraph 5.5 in the LTFP on surcharge was as follows:

“Under certain compelling circumstances, such as an external emergency, it may be necessary to mobilise additional 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 such surcharge will be a temporary measure and phased out over a period of time.” [emphasis provided].

More of a revenue measure

Looking back, it can be seen that only on a few occasions has surcharge been levied for specific purposes — such as the Kargil war and the Gujarat earthquake. But now, it has become more of a revenue-raising measure. This becomes clear from the Budget speeches of Finance Ministers:

1999-2000: 10 per cent surcharge was levied to contain revenue and fiscal deficits and for meeting growing development expenditure.

2000-01: Surcharge continued in view of heavy unexpected expenditure on account of defence requirements and transfer to States mandated by the Finance Commission. In the case of non-corporate taxpayers, it was increased from 10 per cent to 15 per cent and for persons with income exceeding Rs 1,50,000 per year.

2001-02: During the year, 1 per cent surcharge was levied on corporations for the National Calamity Contingency Fund and 2 per cent for Gujarat earthquake relief. However, even after the end of the year, all surcharges, barring the 2 per cent earthquake surcharge, were continued with.

2002-03: The levy of surcharge was justified on the ground of national security.

2003-04: Surcharge on corporations reduced from 10 per cent to 5 per cent. However, individuals and HUFs, having incomes over Rs 8.5 lakh, were subjected to 10 per cent surcharge for security needs.

2004-05: For companies, rate reduced from 5 per cent to 2.5 per cent. For individuals/HUFs, etc., 10 per cent was continued. Further, an education cess of 2 per cent was levied for meeting expenditure on basic education.

2005-06: Surcharge at 10 per cent was continued on individuals and HUFs. In the case of companies, it was raised from 2.5 per cent to 10 per cent. Education cess was retained.

2006-07: No changes. Old rates were continued with.

2007-08: Existing surcharges remained and additional cess at 1 per cent was imposed on higher education. However, companies with income up to Rs 1 crore were exempted from the 10 per cent surcharge.

When revenues are required for general purposes — such as national security, defence, education, growing development expenditure, etc — and on a long-term basis, the proper course would be to raise revenue through rate increases and not through surcharges/cesses. The Government has been claiming that the rate structure is being maintained, even as it has been imposing more burden taxpayers on a permanent basis through surcharges and cesses. This form of taxation, besides introducing arbitrariness in the tax system, makes the administration of tax laws cumbersome and complicated.

Prima facie, subjecting individuals and HUFs to higher rate of surcharge, while charging companies at a lower rate or exempting those with income up to Rs 1 crore but levying such tax on individuals and HUFs who have income exceeding Rs 10 lakh, is not only discriminatory but grossly unjust.

The best way to meet the demands for more revenue is to enhance the rates and not subject the taxpayers to varied kinds of surcharges and cesses, as is being done at present. The Finance Minister should remove this unfairness through the Finance Act, 2008.

(The author is a former Chairman of CBDT.)