TAXATION, INDIA AND THE WORLD*

Dr. Justice AR. Lakshmanan**

The history of taxation seems to be like the history of human civilisations. Indeed we have come to believe that most civilisations shaped out their own form of taxation. Justice Oliver Wendell Homes once said "Taxation is the price we pay for civilisation".

Introduction

The ancient Indian Vedic texts talk about the right of the king to raise revenue by taxation. The great Indian scholar Kautilya's 'Arth Sashtra' has a Chapter of "Taxation". Manu, an ancient Indian scholar, in fact describes that king should realise taxes, "little by little, as a leech, calf or bee, sucks blood, milk or honey" thereby emphasizing the need to extract only what can be spared.

The history of Indian Taxation starts with the first Income Tax Law introduced in 1860 consequent on the financial difficulties arising from the Mutiny of 1857 which came to be known as the first struggle for independence.
The tax was in force for a period of 5 years. It lapsed, but was revived in the form of a Licence Tax on Trades and Professions. Later in 1868 a new tax known as "Certificate Tax", not materially different from the "Licence Tax" was introduced which later came to include agricultural income as well.

With the improvement of financial position, 1873 witnessed the abolition of Income tax. This was not to last for long. The Great Famine 1876 to 1878 brought in the revival of Direct Taxation. This had the character of Licence Tax on trader and a cess on land. The tax was based on local condition which stressed the fact that the power to tax should be based on the ability to bear the burden and was enforced through local Acts.

In time a major improvement was that instead of specifying the rates of taxation in the Schedules to the Act it left the rates to be determined by the Annual Finance Act to give taxation structure greater flexibility and economic relevance. This feature has survived till today.

The period subsequent to 1939 witnessed the Second World War which necessitated raising higher revenues on the land and a closer monitoring on large incomes which were made by certain assessees becasue of the war condition.

The early Beginnings

The Indian Income Tax Act was thereafter referred to the Law Commission and a draft Bill was submitted in 1958. The Law Commission took almost two years to deliberate on and recommend a comprehensive law on Income Tax. Two areas which concerned the government were (i) rationalisation of the Law to prevent inconvenience to assessees and (ii) prevention of evasion of Income Tax. Direct Tax Enquiry Committee, popularly known as Thyagi Committee considered both the angles and submitted a detailed report in 1959 resulting in the Income Tax Act of 1961 which holds the field today, though substantially changed by frequent amendments from 1961 till now.

In the last decade taxation policy has witnessed sweep change starting with reduction of tax rates, repeal of uneconomic tax law and streamlining the system. Abolition of Estate duty, Repeal of Gift Tax, streamlining of the Wealth Tax Act are but a move in this direction. The stress now is on tax payer compliance and reducing the administrative discretion to the minimum.

Objectives of Indian Taxation Law

Taxation has four main purposes or effects: Revenue, Redistribution, Repricing, and Representation.
The main purpose is revenue. Taxes raise money to spend on roads, schools and hospitals, and on more indirect government functions like good regulation or justice systems. This is the most widely known function.
The second is redistribution. Normally, this means transferring wealth from the richest sections of society to poorer sections, and this function is widely accepted in most democracies, although the extent to which this should happen is always controversial.

The third purpose of taxation is repricing. Taxes are levied to address externalities: tabacco is taxed, for example, to discourage smoking, and many people advocate policies such as implementing a carbon tax as a way of tackling global warming.

A fourth, consequential effect of taxation in its historical setting has been representation. Several studies have shown that direct taxation (such as income taxes) generates the greatest degree of accountability and better governance, while indirect taxation tends to have smaller effects.

The Complications of Taxation Law

Taxation is a fascinating branch of law, though highly complex and complicated to comprehend. Its practice demands an adequate knowledge of accountancy and economics besides a fair knowledge of various commercial laws, personal laws, laws relating to property as also civil and criminal laws. The statutes imposing direct taxes on income or wealth are intricate, cast in language which is difficult to comprehend without concentrated effort.
Moreover some of the sections of the Income Tax Act run into pages, comprised of sub-sections, sub-clauses, provisos and explanations not forgetting the amendments.

To the original Act have been made almost 3500 amendments till date.

For a common man it is quite difficult to appreciate frequent changes brought about in the Act. It is a tragedy that millions of man-hours of tax gatherers, tax payers and tax advisors are squandered away in grapping with the torrential spirit of such amendments.

There is an urgent need to appreciate that fiscal policy must attempt at simplification of direct tax laws. The ambiguity in the enactment of tax laws, therefore, needs to be avoided to reduce the zone of uncertainty in tax administration as also to ensure uniform application of laws, which in the ultimate analysis, lead to reduction in litigation. Increased litigation because of ambiguity of legislation is counter productive and fails to achieve the object of the legislation.

Income and Taxation - Global Interpretations

The Indian Constitution Entry No. 47 in List I of the Schedule VII gives wider power to impose tax on items which are really not income. That was how Wealth Tax on agriculture lands was upheld in Union of India v. Harbhajan Singh Dhillon as reported at p. 582 of 83 ITR by the Supreme Court of India.

The theory of 'real income' based upon the fundamental concepts has come to the help of the tax payer where the tax payer is unable to find in the maze of tax laws any other shelter, which spells out exemption from liability or any deduction. It is true that this concept cannot come to the aid of the tax payers merely because he claims something as not his income. Also when the Act deems certain items as income the theory of real income will be of no avail.

The taxpayer as well as the tax gatherer must be not only diligent, but also must exercise abundant care and caution in ascertaining what the real income is that is eligible to tax and what would be the tax that becomes payable on the real income.

Historically tax policies have been developed primarily to address domestic, economic and social concerns. The accelerating process of globalisation trade and investment has fundamentally changed the relationship among domestic tax system.

Globalisation has:
i) Driving force behind tax reforms focused on broadening base and rate reductions thereby minimizing tax induced distortions.
ii) Encouraged countries to assess continually tax systems and public expenditure with a view to making adjustments when appropriate to improve the fiscal climate investment.
iii) Promoted the development of capital and financial markets.
iv) Encouraged countries to reduce tax barriers to capital flows and modernise their tax systems to reflect those developments.

Taxation in India in the New Millennium

The new millennium has witnessed changes all around. The State as a custodian of the common good has pledged itself to economic growth, social development, environmental protection and simultaneously secure for India a place in the Global map. The old concept of taxation as a tool to raise revenues is no longer extant. The Income Tax Act contains provisions for economic growth by providing incentives to setting up industries in backward areas, incentives for exports, incentives for undertakings set up in Export Promote Zone and 100% export oriented units with a view to encourage industrialisation of the country, exemptions in respect of royalties for foreign enterprises, foreign remuneration to academicians, professional income from foreign sources and remuneration for services rendered outside India.

In order to encourage Information Technology and Computer related activities, deductions and allowances are provided to such businesses. With a view to secure infrastructure development, which improves the lot of the common men, sections 80 HHE and 80HHF provide for concessions in respect of infrastructure development. Concessions are given to Senior Citizens and women, rebates to encourage savings and investments and to promote thrift. The Income Tax Act recognises that development of society cannot be the sole responsibility of the State and Non-Governmental organisations contribute substantially to social development. In order to encourage such non-governmental organisations to work in conjunction with the Government to achieve the goal of social, educational and cultural development tax concessions are allowed to Charitable Trusts which contribute substantially to developmental activities.

Environmental protection has been a major area which causes considerable concern. In order to secure these ends provisions has been made in the Income Tax Act to provide incentive for shifting businesses from urban to non-urban areas with a view to reduce imbalances in the ecology. This provision has also a social objective namely, promoting jobs in non-urban areas and to prevent exodus of people from non-urban to urban areas.
Realizing the importance of Taxation, the Government of India constituted Tax Reforms Committee with Dr. Rajah J. Chelliah as its Chairman to review the existing structure of Direct and Indirect Taxes. The Committee under the able leadership of Dr. Chelliah has recommended many far reaching useful changes like lowering of tax for domestic and foreign companies, Taxation of agricultural income of non-farmers, gradual transformation of the present Excise Tax System to a genuine Value Added Tax (VAT) at the stage of manufacture, extension of Modavat to more items, reformation of the existing duty regime for textile sector, abolition of Interest Tax and retention of the general rate of depreciation on Plant and Machinery at 25%. The Committee has made various other recommendations and structural reforms in Taxation with a view to make this country progressive.

Conclusion

These apart, tumultuous changes are taking place in the thinking process of various Governments and people the world over. At this stage the pertinent question for Indian leaders would be, how far the free markets and the opening up of the economy can improve the resource availability at competitive costs and increase the efficiency of resource utilisation. Fiscal and monetary policies concern the very basic frame work of the economy. A frame work inevitably means some constraint. Nevertheless, all constraints are not always inevitable.
The other opinion is that of Haliburton, who said years ago "death and taxes are inevitable". Perhaps, the truth is what has been attributed to J.B. Colbert who seems to have said that the art of taxation consists in "so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing".
As the great Indian poet Kalidasa once wrote1 "Tax must be realised by the king from his subjects as the sun gathers water from this earth only to return it thousand fold."

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* Excerpts from speech delivered at 15th Commonwealth Law Conference, Nairobi, Kenya on 12th September, 2007.
** Former Judge, Supreme Court of India, Chairman, Law Commission of India.