This philosophy has been broadly followed in the past few years in the context of income-tax rates. However, an avoidance route has been worked out (a practice greatly resented by the tax department if resorted to by the taxpayers) to get more tax revenues by imposing doses of surcharges and cesses on an almost regular basis year after year. Even the rates for such levies have been changing year after year through the Finance Acts.
The policy regarding surcharge (there was no concept of a cess at that time) was succinctly spelled out in the LTFP in paragraph 5.5: Under certain compelling circumstances, such as an external emergency, it may be necessary to mobilise additional revenue through taxation. In such an extra-ordinary 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 will be phased out over a period of time.
There have been emergencies in the country, like droughts, the Gujarat earthquake, the Kargil War, which justified levy of surcharges. But continuing with such a levy even after the emergencies were over and to make it an additional source of revenue along-with income-tax is unfair in view of the policy enunciated in the LTFP (supra) that surcharges have to be temporary measures, which have to be phased out over a period of time. If there is need for more revenue on a permanent basis, the proper course is to hike the rates, not collect more tax surcharges year after year, making it a permanent feature in the country's tax system.
The most objectionable feature of surcharges is that they enable the finance minister to follow a discriminatory tax policy. With the Finance Act, 2007, it is proposed that firms and companies with income upto Rs.1,00,000 be exempt from surcharges, but they will be continued with for individuals and HUFs, who have incomes exceeding Rs.10 lakh. This is most objectionable from a tax policy angle.
Income-tax is justified and collected for meeting the country's varied needs with regards to education, health, employment, improvement in the conditions of backward regions, agriculture, water resources, and electricity generation. Ministries are allotted funds from the central kitty for meeting the requirements and needs of different sectors. However, a new precedent was set while presenting the budget for the year 2004 to enlarge the area of tax collections by extending the coverage of surcharge giving it a new name -- cess. In paragraph 22 of the budget speech, cess has been justified saying, In my scheme of things, no issue enjoys a higher priority than providing basic education to all children. The NCMP mandates that the government levy an education cess. I propose to levy a cess of 2%. The new cess would yield about Rs 4000-5000 crore in a full year. The amount collected as cess will be earmarked for education, which will naturally include providing a nutritious mid-day meal.
The result is that taxpayers were made liable to pay an additional surcharge, to be called education cess' across the board at the rate of 2% on the income-tax and surcharge, making cess a 'super surcharge, payable even on the amount of surcharge, besides income-tax.
This unprecedented levy resulted in an infectious impact. A report appearing in the media showed that the chemicals ministry mooted a demand for a 2% healthcare cess to subsidise healthcare for the poor as well as give subsidised medicines to all cancer and HIV/AIDS patients in the country. The ministry planned to raise Rs 6500 crore with the proposed cess to fund a series of welfare measures for the poor. Luckily, the finance ministry has not accepted this proposal. If it had been accepted, there would have been a spate of demands from other ministries, in the name of the poor, for purposes such as the improvement of agriculture, the rural economy, water supply, 100 day employment schemes, and rural housing. This would have resulted in each ministry getting extra funds through the cess system, over and above the normal allocations system, earmarked for specific needs. This in turn would have lead to a heavier burden on the taxpayer and at the same time, the government would say that the income-tax rates were unchanged. This would be a most misleading situation.
However, the finance minister has used the levy of cess for education by increasing the rate of the existing cess of 2% by another 1% saying that the cess of 2% on all taxes is to fund basic education and the additional cess of 1% on all taxes will fund secondary education and higher education. The additional 1% cess will also fund capacity expansion, by 54%, for reservation for the socially and educationally backward classes. This, to say the least, is most deplorable proposal for the following reasons: -
* levy of cesses cannot be a normative way of taxation;
* bifurcating cess levy and making it compartmentalised will result in complicating tax calculations;
* it is a bad precedent to collect revenue through cesses.
When there is an emphasis on making the Income-Tax Act simple, such bypassing of the tax rates and making the taxpayers to do multi-level calculations in the discharge of their income-tax liability is unjustified. If it is felt that for different needs more funds are needed, more allocations can be made through the central pool. It would be wrong practice to create pockets for various ministries in the central tax system, over and above the general allocations, and thus create problems in the administration of the IT. Act besides causing extra financial burden on the taxpayers. This needs to be avoided.
The author is former chairman, Central Board of Direct Taxes