The entire community of salaried tax payers are promptly punished with a regressive tax regime for the sins of a few. The public can have the right to vote or a rational tax system. They can’t have both.

A lifetime spent in looking at the ‘big picture’ may have its intellectual attractions, and if you are the consultant type, then the vocation is not altogether bereft of the purely financial. But it has its drawbacks. You may admire the distant view of the tall teak trees; lose yourself in the majesty of the water cascading down the hills. But you are also liable to miss the thorny growth right beneath your feet until you feel a sharp prick on the unshod sole of your foot and a stabbing pain coursing through the veins.

And so it was with this ‘big picture’ view of the Indian tax laws that I prided myself in possessing a sweeping view of its structure. However, my inadequacies in the understanding of its nooks and corners were painfully exposed by a tax practitioner, the other day.

My colleague was ruing her misfortune at some big punts that she had made in the ‘derivatives’ market that had gone awry, prompting her to close out her position at a considerable loss. Since I knew she traded in them often enough for it to be viewed as an investment business, I consoled her with the advice that she might be able to salvage the situation somewhat by setting off these losses against her salary income. This is after all that time of the year when taxes are never far from your thoughts.

The ‘big picture’ view

Now, my ‘big picture’ view of the tax law told me that it is imposed on the aggregate of incomes earned under different heads; that the notion of ‘income’ for tax purposes is a ‘net concept’. That is, income is the net figure that results after setting off surpluses and deficits from a variety of activities, ultimately forming the basis for calculating one’s tax liability.

Since the aura of expert knowledge I had managed to wear around me is matched only by the extent of ignorance over the nuts and bolts of the country’s tax regime, my colleague dutifully took it up with her auditor. He gave her some explanation about the provisions on set off of losses and how what she was proposing could not be done. She wasn’t entirely persuaded.

The auditor then had to come on the line and explain it to me in some detail that, while the ‘big picture’ view is all very fine, the fact of the matter is that the law had been amended in 2004 to deny the benefit of set off of losses in an investment business against the incomes earned by way of salaries.

‘Unfair discrimination’

True, as a judge once famously remarked (or was it Palkhivala? Whoever), “There is no equity to taxation”. But the situation still left me vaguely disturbed. If a company earns a profit from one business and suffers a loss in another, it is allowed to set off the two against each other and pay tax on the net sum. But my colleague is unable to set off investment losses (sizeable and numerous to boot!) because she has had the misfortune of acquiring the wherewithal for such misadventures from a job in the newspaper. The argument that the restriction on ‘salary’ incomes being used to set off business losses apply to all categories of assesses simply doesn’t hold as it is only individuals who can hold down salaried positions and not corporates. I am not sure it it is a case of ‘unfair discrimination’ and, hence, is violative of constitutional provisions of equality of treatment.

Some GAAR please!

The Government, of course, defends itself by saying that it is a measure intended to plug leakage of revenue. When an average individual with a salary income takes a flutter in the stock market he does so with a view to make some extra money. That he doesn’t always succeed is another matter but the intention to make a profit is always present.

In any case, by no stretch of imagination can such an investment loss be construed as a case of someone contriving to taking a Rs 100 hit just so that he can do the Government out of Rs 30 that it would have been entitled to as tax, from his salary income.

There might well have been the odd case of someone creating a bogus investment transaction in one year only to reverse it in the next year to generate a tax shelter for some salary income in the current year. Such transactions would have very distinctive characteristics.

It should, therefore, be possible to incorporate some general anti-avoidance rules (now made more famous by the acronym GAAR) or even use the well-settled principles of judicature regarding primacy of ‘substance’ over ‘form’ of a transaction to deny that privilege. But abolishing ‘set offs’ of losses does violent injustice to the notion of ‘income’ itself (a net surplus) on which a tax is to be levied.

Net result

Salaried tax payers always get the rough end of the stick in matters of tax policy. Take the case of “Standard Deduction’ which was abolished from the tax code altogether some years ago. This was introduced as a convenient way to bundle all legitimate expenses (conveyance, books, periodicals, and so on) that must be incurred and, without which, it is impossible to pursue a vocation of salaried employment. The net result is, that unlike other sources of income, salary for tax purposes is a ‘gross’ concept while it is ‘net’ receipt for everything else.

In contrast, corporate sensitivity manages to get the taxman’s attention far more readily. The flip-flop on GAAR is a good case in point. Whatever be its merits, and they are considerable, the fact remains that the Government has already pushed its implementation by one year. If the expert committee’s recommendation were to be accepted, then it might well be pushed back by another two more years.

A price to pay

There are lot many more salaried income earners than there are tax-paying corporates. While individuals have votes, companies clearly do not. Common sense would suggest that the Government would be more mindful of doing something that offends the sensibilities of the ordinary tax-paying citizens with jobs. At least, that is what democracy is all about. But companies win nine times out of ten when pitted against the State. Of course, you could argue that not many among those swelling up the ranks of the middle class turn up at the polling booth on election day. But if I were a politician I wouldn’t want to bet on that. So the mystery remains.

Is there an alternative theory? Perhaps there is one. The very fact that there are millions of tax payers with a vote is what makes fighting elections such an expensive business. Oligarchies with commercial interests will naturally spring to the task of finding money for those keen to fight the elections.

In no time a symbiotic relationship develops between the two, so much so, their identities are fused into one. In contrast, the whole community of salaried tax payers will have to pay for some petty attempts at tax avoidance indulged in by a tiny minority. They are promptly punished with a regressive tax regime.

The conclusion is obvious. The public can have the right to vote or a rational tax system. They can’t have both.

Note: The author does receive a salary for his troubles.

(This article was published on September 2, 2012)
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