The Hindu Business Line : Taxing industries, sparing the industrialists

The policy of not taxing industrialists was taken to its logical conclusion by abolishing tax on long-term capital gains from shares only if the related transactions suffered STT.

The corporate sector has always been the favourite whipping boy of finance ministers because of its perceived ability to pay more tax.

In India, the tendency to fleece the corporate sector shows no signs of abating.

The corporate tax rate was indeed brought down to 30 per cent from 35 per cent, but the surcharge of a hefty 10 per cent on domestic companies makes this reduction largely illusory.

The dividend distribution tax of 12.5 per cent on domestic companies effectively makes the effective tax rate that much higher if one grants that sooner or later the entire profit would be declared as dividend what with bonus shares and buybacks, the two modes of rewarding shareholders sans distribution tax, are not as common.

The Fringe Benefit Tax (FBT) of another hefty 30 per cent plus surcharge is the final nail on the corporate coffin. The FBT taxes the fringe benefits provider and, ironically, not the enjoyer of these benefits. In short, the government's credo seems to be, tax the industries not the industrialists.

And behind this credo lurks a dangerous theory — target those who are easy to tax and leave the ultimate beneficiaries of income severely alone.

Double taxation

Distribution tax was ushered in ostensibly to overcome the problem of double taxation — asking shareholders to pay tax on tax-paid profits — of dividend.

That the vexed problem hasn't been overcome would be evident if one realises the fact that this time round the double taxation is on the same person, the corporate sector that first pays corporate tax and, thereafter, distribution tax as well.

While the regime has doubtless facilitated tax collection what with collection of tax from a few thousand companies being laughably easier than collecting tax on dividend from the unwieldy millions of investors scattered across the country.

The bottomline is the country's who's who on the industrial firmament doesn't pay tax — small wonder that many industrialists taking away huge tax-free dividends has raised a lot of eyebrows especially amongst the middle-class which found something remiss in a system that leaves the well-heeled severely alone.

The government is resorting to the easy way out. The imputation system, admittedly a lot more difficult to administer, would have addressed the problem of double taxation in a fairer manner and more completely. Under that system, the tax paid on distributed profits by a company is passed on to the individual shareholders in proportion to their shareholding through what one could call pass-through certificates so as to enable them claim credit for that from their tax liabilities on income, including such dividend.

That it would stretch the resources of the department is a weak alibi, to say the least, given the truism that tax should be ideally imposed on the ultimate beneficiary.

The policy of not taxing industrialists was taken to its logical conclusion by abolishing tax on long-term capital gains from shares if but only if the related transactions suffered Securities Transaction Tax (STT), which admittedly is just a slap on the wrists of tycoons.

The small mercy is that this time round the tabs of STT would not be picked up by the industries but by the industrialists. The bottomline of this policy: The richest of this country can get away without paying any income-tax.

To secure inter se equity and to garner greater revenue, the government ought to have introduced STT in addition to and not in substitution of capital gains tax.

What weighed with the government in going for this trade off was the salivating prospect of huge STT collections, thanks to the surge in stock exchange trading volumes.

While this might have indeed set the government's cash register ringing, the hard working middle-class taxpayer eking out his living through the only source he has — the salary — is not amused.

(The author is a Delhi-based chartered accountant.)