“Those who watched the presentation of the Budget on television must have been distressed to see some MPs behave like unruly, irresponsible school children. You are reminded of Rudyard Kipling’s dictum ‘Politics is a dog’s life, without a dog’s decencies’.
The biggest curse of the party system in any democracy is that it breeds a tendency to look at every measure on purely party lines. An almost universal tendency of all politicians is to view the Budget not as a national budget but as a party budget. This causes either wholesale approval or total condemnation by those politicians whose critical perception is no higher than forty watts.
The detailed proposals in this year’s Budget are, as usual, less important than the overall thrust of the package. The Budget is historically important because it marks a turning point in the way Indians think about their economy – less like a tortoise and more like a tiger. The arthritic economy is increasingly performing like an athletic economy.”
-PALKHIVALA ON BUDGET 1994-1995
There has been as many as 87 amendments, many of them tinkering with monetary limits and time limits for various purposes, mostly marginal in character.
There has been no consistent policy behind direct tax proposals. There was assurance that there will be no retrospective levy but there are retrospective amendments from 1962, 1975, 2012, 2013 and 2016.
There was assurance of significant reduction of tax, to enable which many significant and necessary exemptions were weeded out, but new exemptions under section 80IAC and 80IBA have come in indicating no rational choice of businesses for exemption. The expected reduction in rate of tax is nominal. No notice has been taken of the substantial increase in tax collection and cash flow consequent on demonetisation of High Denomination Notes. It is a gross omission. If it had been taken into consideration, a more positive programme of action and budgeting for the financial year 2017-2018 would have been possible.
Some of the proposals are welcome and others glaringly in need of review. Welcome features are first listed below:
(i) Transfer pricing rules: A welcome amendment is dropping of transfer pricing adjustments for domestic transactions.
(ii) Capital gains : Welcome amendments in the matter of capital gains are firstly reduction of holding period from three to two years for immovable property to qualify as a long term asset and thereby conferring a lower rate of tax applicable for long term capital gains. Secondly option date for indexation of value of capital assets inherited or received as gift has been substituted from 1.4.1981 to 1.4.2001 eliminating capital gains consequent on inflation as between 1981 and 2001 for assets acquired before 1981.
The controversy as to the timing on which capital gains arises has been resolved by the proposal to introduce sub-section (5A) in section 45, that in the case of individuals or Hindu Undivided Families (HUFs), who enter into a joint development agreement, capital gains would arise on date of certificate of completion of constructed property, which is a beneficial provision apart from removing the uncertainty in law.
(iii) MAT credit : Credit for Minimum Alternate Tax (MAT) tax paid against tax on statutory income under section 115JAA can be availed for fifteen years as against ten years at present, subject only to the further adjustment for the difference between admissible foreign tax credit against MAT tax and tax on regular assessment.
Computation of book profits under section 115JB is now required to be made in accordance with the Indian Accounting Standards, so that the book profits are now required to be computed on a more objective basis.
(iv) Appeal : An appeal against the order of Chief Commissioner refusing approval under section 10(23C)(vi) or (via) is now made available to the Appellate Tribunal. The law prior to the amendment necessitated the more expensive course of writ before the High Court.
The other proposals which would require more mature consideration are hereinafter listed.
Tax on carbon credit sales
Among the amendments meant to neutralise the decisions of the Courts, the treatment of carbon credits is one. Proceeds of carbon credits are deemed under new section 115BBG as taxable revenue receipt, notwithstanding the consistent view taken by the Courts in the light of the fact, that the amounts realised on carbon credits earned on reduction of pollution by incurring additional cost on plant and machinery, so as to have capital character and not revenue as wrongly deemed under the new section. It should, therefore, be dropped at least for the reason that the exemption by treating it as capital receipt would be an incentive inspired by Kyoto Protocol for green revolution.
(i) The prescribed mode is now sought to be extended with the object of promoting cash transactions in account payee cheque, account payee draft or by electronic clearing system through a bank. Reduction of limit of transactions other than this mode under section 40A(3) is from Rs.20,000 to Rs. 10,000. This will place a heavy burden on semi-wholesale and retail business. The exceptions now permitted under Rule 6DD are too limited. If this reduction cannot be reversed, the scope for exceptions under Rule 6DD has to be expanded by restoring clause (j) which made an exception for transactions under compelling circumstances, giving some discretion to Assessing Officer to understand “reasonable cause” for more pragmatic application.
The onerous penalty under new section 271DA equal to amount of receipt exceeding Rs. 3 lakhs is again draconian, if not in prescribed mode in violation of new section 269ST. Penalty cannot exceed the tax on income sought to be evaded on the inference of tax evasion by resort to cash transactions. The entire turnover cannot be a base for penalty.
(ii) Another onerous provision is disallowance of capital expenditure exceeding Rs.10,000 as for repairs and replacement for plant and machinery, where the payment is not by the prescribed mode, so that where it is not admissible as revenue expenditure, it will lose even depreciation because it is paid in cash, because of the new proviso inserted before Explanation 1 to section 43(1) would not treat it as addition to actual cost eligible for depreciation. The weighted deduction for capital expenditure under section 35AD(7B) will also be consequentially reduced, so that the relief under section 35AD is correspondingly curtailed distorting the relief. Both these punitive provisions do not have any rational justification.
(iii) Another effort to promote cashless transactions is to require prescribed mode of payment with the limit reduced from Rs.10,000 to Rs.2,000 for donations to charitable trusts or institutions for deduction under section 80G. There is also a similar reduction in limit for donations to political parties from Rs.10,000 to Rs.2,000 under section 13A.
All these provisions to encourage cashless transactions need review. Such limits are easily circumvented by splitting the payments, while placing pressure on both taxpayers and tax administration especially on those in small and rural sectors. The transactions in cash are likely to be unaccounted because of the tax liability by disallowance of legitimate expenditure on purchases and other expenses, so that there would be loss of revenue. It is better to promote cashless transactions by extended facilitation for them and education for use of electronic means rather than by such pressures, which are not practical means for carrying out the expected reform.
Charities are targeted by many amendments. Any modification of the objects of the trusts or institutions, irrespective of the fact, whether it is a mere clarification or alteration of objects, triggers fresh registration proceedings under section 12A/12AA.
Withdrawal of recognition of application of income for charitable purpose through other charities under section 10(23C) and 11, if done by way of corpus donations, is meaningless, since the charitable purpose still continues, while satisfying the requirement of 85 per cent application.
A third amendment confers survey powers under section 133A against a charitable trust or institution.
It is unfortunate that charities become target of every Finance Bill creating hurdles for private philanthropy which supplements the activities of the Government.
Consequences of delayed return
The need for timely filing of return for availing the statutory right to exemptions and deductions has been extended for exemption covered by sections 10 and 13A. There is absolutely no reason for linking timely filing of return for computation of income under the statutory provisions, when the law already provides for interest and penalty for late returns.
Apart from penalty under new section 271DA for violation of new section 269ST equal to the amount of receipt of Rs. 3 lakhs and more, there is also the proposal for penalty of Rs.10,000 under section 271J for incorrect information furnished by accountants, merchant bankers and registered valuers. It is an amendment in terrorem meant against professionals assisting the implementation of law. It is bad because it is likely to be misused by the authorities even in cases of honest differences.
National Tax Tribunal
The legislation introducing National Tax Tribunal Act, 2005 replacing the High Court so as to discontinue the cacophony of conflicting decisions continues to be in a state of suspended animation, since certain provisions in that Act, which were found to be unconstitutional, have not received the attention of the Government, though more than a decade is past. There is no word about it from the Government in the Act, budget speech or any policy statement.
The proposals in the Finance Bill distances the law from simplicity besides the proposals being by and large not serving the purpose of encouraging industries for the much needed development of the economy, while compliance is made more difficult with many provisions which are extremely harsh, so that neither the substantive or procedural law is taxpayer-friendly contrary to the professed objectives.