The penchant of Indian policy makers for complexity is inexplicable and at times, exasperating: it baffled Lord Curzon at the turn of the nineteenth century; it baffles us even today. Two recent developments in the field of taxation capture the nature the problem we face. The experience of 140 countries with GST appears to suggest that its advantages are optimised only when it is kept simple. It should ideally be levied at a single rate or at the most three rates, with either nil or minimal exemptions. In our country, considerable complexity is already inherent in the enactment of 38 pieces of legislation covering the centre, 29 states and seven union territories.
Instead of following this tested formula, GST Council has opted to further complicate matters: it has granted significant exemptions and opted for six rates—0, 5%, 12%, 18% and 28%—with a further cess on demerit and luxury goods in the highest slab. This cess is meant to compensate the states for loss of revenue and restore the taxation level on these goods to what it is today. Small businesses with a turnover of less than `20 lakh have quite rightly been exempted; but with far lesser justification, so too, for the time being, have real estate, electricity, petroleum and alcohol. As a consequence, many businesses may be prevented from claiming input credits emanating from these sectors.
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Multiple tax rates in practice only lead to a plethora of classification disputes, many of which will be dragged to the Supreme Court, thus further clogging an inefficient judicial delivery system. High tax rates on goods consumed by the rich make for attractive socialist rhetoric, but in reality they are counter- productive, especially in a country like India. They are unjustified for another reason as well: luxury goods are usually expensive; and a person who buys them will in any case have to pay a higher price plus higher tax even at the standard rate. Why then should she be called upon to pay tax at anything more than this rate? In fact, many social scientists would argue that what a person decides to consume is essentially a matter of personal choice—the role of the state in determining such choices should be minimal.
All these defects and complexity in design notwithstanding, the roll out of GST in a vast, diverse country such as ours, must stand out as one of the outstanding achievements of our times. The other development relates to the field of income tax: It involves a case study which is reflective of the failures of our governance. The case itself is unremarkable, except that it is typical of the climate of uncertainty and confusion often created by hastily drafted tax laws. Yokagawa India Ltd is an Indian company, but is controlled by its Japanese parent headquartered in Tokyo. In its return of income for the assessment year 2002-03, it claimed that the income from one of its 100% export-oriented units was exempt from tax under section 10A of the Income Tax Act. This section figures in chapter III of the Act which deals with exemptions. But the section itself strangely stipulates that the profits and gains of the undertaking would be allowed as a deduction from total income. If taken literally, this concept would be impossible to implement because total income is the final figure on which tax is computed. We can conceive of a deduction in the computation of business income or from gross total income but not a deduction from total income.
The Supreme Court has now resolved the controversy fifteen years after the assessee first made the claim, and four years after the provision was discontinued. It has ruled that the provision provides a deduction to be allowed from business profits.
Nonetheless, it does raise a number of serious concerns for everyone who wants to see governance improve: One, why should a tax instrument, devised primarily for raising revenue be used for extraneous purposes? If exports are to be encouraged, or scientific research or family planning promoted, rather than provide for a tax relief, would it not make much more sense for the government to pay a cash subsidy directly to the taxpayer? If this were to happen, the line ministries too, might become less enthusiastic in sponsoring such schemes.
Two, tax officials are not really equipped to ascertain whether the objectives which the government wants to achieve through such tax provisions are actually being realised or not.
Three, such provisions have contributed significantly in cluttering various judicial forums. The latest report of the Comptroller and auditor general (CAG) on direct taxes (2 of 2017) indicates that as on March 31, 2016, 70,371 cases with a revenue of `3.04 lakh crore were locked up in appeals filed before the Income Tax Appellate Tribunal, High Courts and the Supreme Court.
Finally, some of the best brains of the nation are involved in interpreting the scope of tax reliefs; their talent could perhaps be much better harnessed for doing something more productive.
More than a hundred years ago, Lord Macnaghten reminded the House of Lords: “Income-tax, if I may be pardoned for saying so, is a tax on income. It is not meant to be a tax on anything else.”
In India, income-tax did not take this route. We hope GST will do much better.