Unmerited exemptions galore

S. MURLIDHARAN | Updated on April 12, 2011

A controversial tax waiver   -  Getty Images

It's time the government sent out a message that it has not forgotten the basic principle of taxation - tax according to the ability to pay.

International Cricket Council (ICC) knew that despite relocating its registered office from London to Dubai, a more salubrious tax environ, it could not hope to get away from tax liability in India from the sizeable income it knew it would earn from the World cup matches

The source rule was staring it in the face - income earned in India is taxable in India. Of course, it could have pulled a few strings and prevailed upon the Emir of Abu Dhabi to tweak the Indo-UAE DTAA in its favour just as vested interests in India had got written a seemingly innocuous clause in the Indo-Mauritius DTAA long ago. But ICC did not have to go that far. It knew that Section 10(39) of the Income-Tax Act inserted with effect from April 1, 2006 was tailor-made for it. . One wonders why Mr Suresh Kalmadi, no less a genius at pulling strings , did not notice this provision in the income-tax law or for that matter the wily Mr Lalit Modi who transformed cricket into a full-blown business, did not.

Whether ICC was the first to spot this provision or its patron Chief, Mr Sharad Pawar, does not matter. What matters is Mr Pawar reportedly participated in the Cabinet meeting and exerted his influence to get the tax exemption.

Apart from the impropriety of an interested Minister attending and influencing the Cabinet meeting — as per the Company Law an interested director cannot participate, much less influence the board, the exemption has shocked the collective conscience of the nation.

Frightening provisions

There are reports doing the rounds that the government has agreed to exempt only Rs 45 crore whereas the reported income of ICC from the event is Rs 905 crore. Section 10(39) does talk of the specified income being exempted. Heaven knows to what species the Rs 45 crore reportedly exempted belongs.

There are some provisions which are frightening by their sheer presence. They tantalise one to misuse and abuse. The Central Board of Direct Taxes is reported to have stumbled upon a new stratagem for tax evasion — float political parties. With political parties exempt from tax and donations to political parties deductible from one's taxable income, politics makes for a heady mix, vindicating the cliched expression politics is the last refuge of scoundrels.

Section 10(39) says in the international event hosted by India there must be at least three participants to be eligible for the exemption. The way the section is couched, not only institutions but also individuals can angle for and get the exemption.

The cricket world often sees the farce of a triangular series with one of the teams eliminated after a series of matches and the remaining two teams playing the final. Now all that a wily cricketer has to do is to pull a few strings and ask the government of India to kindly notify him for exemption.

The Direct Taxes Code before Parliament is unfortunately a rehash of the existing law, departing as it does, from its draft version.

The government's stock would go up considerably if it not only launches a frontal attack on corruption but also sends out a belated message that it has not forgotten the basic principle of taxation - tax according to the ability to pay.

Both the existing regime and the one in the offing are guilty of indulging the capital market including the deep-pocketed foreign institutional investors (FIIs) on the smug plea that taxing them would douse the flames of the share market so crucial for economic development.

Both FIIs and ICC would court India even if there are taxes because what beckons them is the enormous scope for making money in India. If tax is the only counter, banana republics and countries ruled by tin pot dictators offering banking secrecy and tax immunity would have been in the forefront of economic development. Smart businessmen are not put off by taxes. For, they factor in tax as an unavoidable expenditure. Time we rewrote our income-tax law and stopped playing favourites.

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

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Published on April 09, 2011

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