My very respected and learned email friend (Former) Justice Sri T.N.C Rangarajan, ( https://tshc.gov.in/retjudges/tncrj.htmlhttps://tshc.gov.in/retjudges/tncrj.html ) distinguished expert on Indian Taxation Laws and I only yesterday were corresponding with each other on the ongoing national debate triggered by one of the most controversial promises made in the 2024 election manifesto of the Congress Party — “income and wealth distribution” — that was made even more controversial by the ill-timed and imprudent suggestion of an “Inheritance Tax” by a strong supporter of Rahul Gandhi, the NRI businessman in America, Sam Pitroda.
Justice Rangarajan and I got around to sharing some emails on economic theories of taxation as propounded in the classical literature of Nicholas Kaldar of the 1960s and Thomas Piketty of 2010s … The Judge then was kind enough to share with me a transcript of a public speech he had given on a forum way back in 2008 on Indian Taxation. His talk was beguilingly titled “KALDAR TO CHAOS” !
The Judge Rangarajan’s transcript (scroll down below to read it patiently please) is a lengthy one but as I started reading it … (as a Chartered Accountant myself of 1982 vintage”… I was absorbed reading it . It was a brilliant encapsulation of not only the chequered history of taxation in India, but also of its present-day vagaries and perversities circa 2024 … After reading the transcript I wrote back to the Judge this below :
Sir,
I read the entire transcript of your talk in one go …! Very substantive and engrossing at the same time.
Since the talk was given way back in 2008 … and much water has flown under the bridge since then in India … I wish Sir you’d please take time to revise and update the text where necessary to reflect present situation and then re-circulate it again for the benefit of the general public.
It would be very great service you’d be doing Sir if you did so … to educate the IT Dept, the CA fraternity to which I too belong, all young students of taxation and taxation laws as well as the millions of tax-assessed in this country.
The myriad problems of tax administration highlighted by you succinctly and the many insightful suggestions you have given towards the end of your talk to improve it … are worth bringing to the attention of the MoF again even today in 2024 since many of them I think remain very much topical, outstanding and uncured.
You couldn’t have put it more starkly than when you said “Taxation is a tug of war between the government and the citizen”! And I while reading this talk of yours have become only more firmly convinced that it is not a war of equals… and it’s a war of grinding, enervating and relentless attrition where it is never Goliath’s intention to vanquish David but only to go on harrying and harassing him .
Regards,
Sudarshan
***************
Here below ⬇️ is the full transcript of Justice Rangarajan’s Talk . It’s long … but no one — CA, lawyer or student of taxation — who patiently reads it will fail to profit greatly from it.
KALDOR TO CHAOS
1. INTRODUCTION
I am privileged to be invited to deliver the Ras Behari Memorial Law lecture. Sri Ras Behari Ray was born just a year before my father. I recall the father figure whom I had met when I first came to Cuttack in 1974. He was the Chairman of Tax Bar Associations of Orissa and he welcomed Brother Rotho and myself when we were posted here. Besides being an expert in tax law he could lace his conversations with spiritual wisdom. The best tribute I can pay to that great personality is to present a lecture which I hope he would have approved.
Cuttack was my kindergarten for income tax. I learnt many things here. I got married when I was here. So I took brother Rotho’s advice and visited Puri and Konark and learned many things from the sacred to the profane. I have made many friends here. Those who appeared before me in the Tribunal have prospered and have become personalities to acknowledge. So when the opportunity came to visit the field of my initiation, I thought I should have an overview of what I had learnt.
2. SEEKING A PATTERN
It is human nature to seek a pattern in everything. I believe there is a big board in the Smithsonian Institute at the front and the lights flash there at random and it is an experiment to see how much an observer is frustrated when no pattern is discernible. When we were hearing cases in the Tribunal here, we saw only the particular section that we were dealing with and at best with the scheme as it applied to that assessment year. In fact my senior used to say that judges are often behind times because they deal with the law applicable some years back, as the cases take time to come for hearing and may not know the current law. I thought this is now the chance to see the wood instead of the trees and try to see if there is any method in the madness of the tax tangle.
3. ORIGINAL SCHEME
We may not recall that the 1961 Act was the kingpin of a system of taxation proposed by Prof. Nicolas Kaldor. It was a tight system with income tax, expenditure tax, wealth tax, gift tax and estate duty. The tax chased you from womb to tomb. Earn and pay tax, spend and pay tax, save and pay tax, gift and pay tax and die and pay tax. The objective was socialistic distribution of excess wealth. When we look back we find that the entire system has slowly changed to something else without anyone being aware of it or planning it. Let us see how this incrementalism has happened. Estate duty was abolished in 1984, Gift tax was omitted with effect from 1st October 1998, Wealth tax reduced to tax on non-performing assets from 1st April 1993, Expenditure Tax abolished within three years of its introduction in 1956 and again revived in 1987 to tax expenditure in hotels. But we have other taxes such as Banking Cash Transaction Tax, Fringe Benefit Tax, Securities Transaction Tax and Service Tax. But they do not make any system as such.
4. INCOME
Income was advisedly left undefined. It is generally understood as a periodical monetary return coming in with some sort of regularity from a definite source similar to the fruits of a tree. But by an inclusive definition, receipts which may not be regarded as income have been now included such as voluntary contributions to a trust, perquisites and special allowances, capital gains, winnings from lotteries and races, and even gifts and loans.
5. PREVIOUS YEAR
The 1918 Act levied income tax on the income of the current year itself, by taking the previous year’s income as the basis and adjusting the current income at the end of the year as well as aggregating the income from all sources for the first time. The 1922 Act created a charge on the income of the previous year itself. Such accounting year was also at the option of the assessee to end on a date of his choice. The 1961 Act began with that position and slowly removed that option so that the previous year is only the accounting year ended 31st March, the earlier fiscal year. It is as if the previous year is itself the assessment year though named as the next year. Though it is meant to provide for uniformity, it has a couple of drawbacks. It requires the assessee to prepare accounts afresh upto the required date, though it is kept on another preferred date for ascertaining the profits. It also does away with the staggering of the due dates for filing returns resulting in overload at the uniform due dates.
6. COLLECTING DATA
In order to levy the tax we have to find the income and identify the assessee. The original method was for the assessing officer to identify assessees by survey and send notices calling for returns. This has been replaced by voluntary compliance by requiring the assessees themselves to file the return, if they have taxable income. This was sought to be compelled by the one by six scheme, requiring filing of returns if any one of six criteria is met. But nothing came out of it and it was abandoned in 2005. The latest is the e-filing of the return without any annexures to explain the items of income. Of course the powers of survey and search are still there to ferret out the assessees in hiding. In addition, financial institutions are required to file an Annual Information Return giving details of high value transactions.
7. HEADS OF INCOME
There were six head of income – salaries, interest on securities, income from property, profits and gains of business, capital gains and income from other sources. The head of income ‘interest on securities’ has been omitted by Finance Act 1988.
8. SALARIES
The definition of salary has been slowly expanded to include every kind of perquisite and to top it, all there is a Fringe Benefit Tax on the employer for the benefits supposedly enjoyed by the employee. Even terminal benefits are sought to be taxed such as leave encashment, which thanks to the Tribunal, has become tax free. Valuation of perquisite has been a handle for increasing the tax by rules. Here again the treatment of the government servants and the other employees is marked by a distinction without a difference.
9. PROPERTY
Income from property was assessed on notional rent even if it was self occupied on the premise that what is saved is income. But now only rent from property is taxed at actuals. It has also become subject to Service Tax as well as deduction of tax at source.
10. BUSINESS
Computation of the income from business has always been a contentious issue. While assessees hope to reduce the taxable income by reporting less receipts and inflating the allowable expenditure, it is the constant effort of the revenue to do the opposite. This has led to several games of hide and seek. Revenue went to the extent of disallowing even expenditure on offering tea or coffee for the customers. Incentives were another bane of the assessees. There was a media hype that many a company has become zero tax company by availing the tax holidays. Minimum Alternate Tax was introduced by Finance Act 1987.
11. METHOD OF ACCOUNTING
Originally, assessees were allowed to maintain their accounts according to the method of their choice of cash system or mercantile system or a combination of both in a hybrid system. In the the case of professionals like advocates the hybrid system of accounting for receipts on cash and expenditure on accrual was the most sensible because of the uncertainty of the receipt of fees promised. That has now been abolished and the assessees have to choose only between cash and accrual systems. In spite of that, in the accrual method of the assessee, the revenue interferes by disallowing expenditure not paid within the previous year. So what is bad for the assessee is good for the revenue and accounts can be willfully distorted for increasing the liability.
12. OTHER SOURCES
Income not falling under any specific head is charged under the head income from other sources. Dividends and interest income fall under this category.
13. CASUAL INCOME
Casual receipts are windfall and cannot be income at all. It was fully exempt initially but in 1972, winnings from lotteries were brought to tax and other casual receipts were exempt only to the extent of Rs 1000. Though this limit was increased to 5000 in1986, eventually the exemption itself was removed altogether.
14. ASSESSMENT
Originally, there was a hearing and a reasoned assessment order after scrutiny of the accounts.. Then there was a stage of accepting the returns with prima facie corrections. Then intimation of acceptance without scrutiny. Then the acknowledgment of the return itself is an assessment.
15. RATES OF TAX
The high rates of tax in early sixties were drastically brought down in 1997. Due to inflation the threshold exemption limit has also gone up. There is also deferential higher exemption limit for women and senior citizens now.
16. COLLECTION OF TAX
The main object of the levy of income tax is to collect it. The original idea was that the income of the previous year would be computed after the end of that year and assessed to tax. Slowly most of the income is subjected to deduction of tax at source. The rest is subject to payment of advance tax to the extent of 100% even 15 days before the end of the previous year. The situation has quietly gone to 1918 position without any clear declaration to that effect. In addition to that, dividends, interest, and lottery income have been subject to full deduction before receipt. They are also left out of the total income. The continuation of the total income concept seems to have lost its rationale.
17. LITIGATION
The original pattern was an appeal to the Assistant Commissioner, a second appeal to the Appellate Tribunal and then a reference on a question of law to the High Court and eventually an appeal to the Supreme Court. The reference has now been replaced by another appeal on a question of law. In addition, the High Court is sought to be replaced by a National Tribunal. The composition of the National Tribunal with members drawn from the department has attracted justified criticism and the matter is pending consideration at the behest of the Supreme Court. In my opinion this is corrupting the Constitution, as the basic feature of the constitution is that only the judiciary can adjudicate questions of law. At the same time, the revenue has powers to revise the assessments for lapses as well to bring to tax escaped income. The change brought about is the time available to reassess which has come down to six years from the earlier ten years and the abolition of the need to record reasons.
18. CHANGING THE RULES
A peculiar feature of income tax law in India is that whenever the court rejects the meaning attributed by the department to a provision of a statute, the law is amended retrospectively. It is almost a childish assertion that it should never be taken as anything different from what the department meant. To take a few examples:
● Court says capital gains on sale of agricultural lands cannot be taxed – Explanation added to Section 2(1A) with effect from 1.4.70 by Finance Act 1989 declaring it to be assessable.
● Court says only amounts validly due and payable can be disallowed – Explanation 2 added to Section 43B by Finance Act 1989 with effect from 1-4-1984 that “any sum payable” includes any sum not payable within the year
● Court says wealth tax is a deductible expense – Clause (iia) inserted in Section 40 (a) by Amendment Act 1972 making it inadmissible with retrospective effect from 1-4-62
● Court says coffee and tea expenses are not entertainment– Explanation 2 added to Section 37 (2A) by Finance Act 1983 with retrospective effect from 1-4-1976 to say that it is.
These amendments deprive the honest assessees of the benefit of the judgments of the courts, which alone are empowered by the Constitution to give meaning to legislation. Surprisingly, though the Supreme Court only declares the law and such declaration is ipso facto retrospective, it preferred the concept of prospective overruling to avoid injustice to those who might have followed the law as it was understood, before the Supreme Court gave a different meaning to it. Yet, retrospective legislation, which may be acceptable in the case of technical faults, have been left untouched even where it would make the earlier levy unconstitutional. Such retrospective legislation requires the assessing officer to reopen many concluded cases and make fresh demands because the CAG feels it would be a revenue leakage. We are not unique in this respect as in UK, the finance minister announced that if they find any tax avoidance schemes they would introduce legislation to make them illegal.
19. PATTERNS
There are three noticeable patterns in the process of changing tax law.
● First the emphasis is on levy of more and more taxes, squeezing those already in the tax net and fierce collection. Surcharges come and go and come back. Service tax expands exponentially. Unconstitutional levies such as Fringe Benefit Tax, Cash Transaction Tax and substitution of registration value for stated consideration in capital gains, abound.
● The second is the outsourcing of the process as much as possible. Deduction of tax at source is making the employers work for the department. The Planning Commission has estimated that the cost incurred by companies for such gratuitous work is nearly 45% of the tax collected at source. Returns are prepared by the assessees but the annexures are to be retained by them, meaning storage of the record is outsourced.
● The third is controlling the litigation. Packing the adjudicating forums and retrospectively amending the statutes to overrule adverse judgments are the methods.
20. CONCERNS
Taxation is essentially a tug of war between the state and the individual. Instead of the State existing for the citizen and facilitating a good life, the department now expects the individual to exist for the state and do all its work. Outsource everything and take a vacation can be the motto of the department. The principles of taxation such as being simple, certain and equitable are sacrificed at the alter of increasing revenue. There is also the angle of Human Rights which include the right to life, the right to privacy and freedom from discrimination and procedural fairness. Making an employer collect the tax without remuneration is but slavery. Making a public profile with data inputs distorts the income of the assessee. Such methods are appropriate in a society where all transactions are banked or done electronically. Outsourcing the data entry is a breach of the right to privacy as contractors will not be governed by the statutory controls. There is a grave danger of the financial information of citizens being sold to unsocial elements. Lack of taxpayer friendly methods of resolving differences can contribute to corruption at all levels.
21. EVIDENCE BASED POLICY
Modern government requires formulation of policies based on evidence. Of course the Finance Minister must have been supplied with data based on which the policies of each Finance Bill is made. However the citizen or even the Members of Parliament are unaware of the basis. To understand the situation let us take the case of returns filed by individual tax payers. We do not know how many tax payers are there in the initial band of 10% tax rate and how many of them are government servants and how many finally receive refunds due the tax deducted at source being more than the tax payable on their total income. The Controller and Auditor General of India in his report for 2005-2006 states that the government refunded Rs. 30,032 crores from gross collection of Rs. 1,87,294 crores and paid interest amounting to Rs. 4,575 crores which worked out to 15 percent of the amount refunded. This information gives an idea about how the exercise of annual filing of income tax returns is infructuous when most of the tax is deducted at source. A more poignant situation is when tax is deducted, though the person has no taxable income. Of course the person could have avoided it, if he had filed a declaration to that effect and he can also ask for refund. But both the exercises involve only compliance cost without any benefit either to the taxpayer or the department. Similarly when an amendment is made retrospectively to overcome a judgment of the Supreme Court we do not know how many assessees had benefited by that decision, how many assessments will be revised and how much revenue will be generated by that exercise, not taking into account the further work to be done by the taxpayer and the government department concerned. Such data would show up the cases where the amendment is made only to assert the view of the government and nothing else.
22. ELSEWHERE
In the USA there is a movement for a Flat Tax. There is also a debate about National Sales Tax replacing income tax. Above all there is a National Research Program to collect data and ensure taxpayer compliance with minimum burden One general concept of such a system is for IRS to generate tax returns for individuals who volunteered to be covered by the system on the basis of (1) income reported on information returns and (2) information on filing status and dependents provided by taxpayers on a new simpler tax form. IRS would then mail the returns and refunds or tax bills to taxpayers, who would need to review their returns and notify IRS whether they agreed with the return information. In Canada, General Sales Tax had replaced income tax . Australia also has gone the GST way. There is no direct tax except withholding tax on wages, so that no individual has to file any return at all. In UK, however, the pattern is the same as here. But UK taxation is covered by the European Convention for the Protection of Human Rights and Fundamental Freedoms, incorporated into UK law by the Human Rights Act 1998. In summary, these principles require the court to consider not only whether the relevant authority acted reasonably, carefully and in good faith but, in addition, whether the authority’s action was proportionate to the aim pursued. Importantly, incorporation of Convention rights by the HRA has “brought the concept of proportionality directly into force in the law of the United Kingdom”, and that concept is now “at the heart of the HRA case law.” What this actually means in practice is that, rather than questioning whether a public authority reasonably believed that their decision was proportionate and not therefore irrational, it has to be asked whether the decision was in fact proportionate.
23. SUGGESTIONS
I believe that any criticism should be constructive. So here are a few of my suggestions, for whatever they are worth, for being taken up by the profession.
● The tax system should be established properly to achieve the objects of taxation.
● The Finance Minister announced that at his request, the Empowered Committee of State Finance Ministers has agreed to work with the Central Government to prepare a road-map for introducing a national level Goods and Services Tax (GST) with effect from April 1, 2010 Since it would cover all expenditure by individuals and leave out basic necessities and thereby not harsh on the poorer sections, it would be a good idea to abolish personal income tax altogether.
● Taxing the total income as a concept has become meaningless, as many items such as dividends, mutual fund income, income from lotteries etc are separately taxed. It is only the aggregation of income which requires the filing of returns and processing them. If the idea of total income is given up, lots of paper work can be saved leading to great savings in government and private expenditure.
● Taxing the salaries of government servants is a wasteful exercise. Government is taking back what is given by government itself and is essentially an accounting entry which unnecessarily involves tremendous paperwork and infructuous work by government officers. Why not abolish tax on government servants’ salaries and make it clear that government service being a status and not a job, it would be paid less than the market rate for such services, because it would give them tax free income as well as dearness allowances. Besides, Government servants enjoy other perquisites such as accommodation, health care etc which the private sector cannot give in those terms. Since the Government has to decide on pay revision this is the appropriate time to do it.
● Taxing private salaries involves deduction of tax at source. Now that consumption tax has the ascendancy it would be inequitable to tax the salary as well.
● Deduction of tax at source is an imposition on the payer – an outsourcing of work without remuneration. It can be replaced by a system of getting the tax from the payee instead. Since there is a system of identifying the payee by PAN number it would be easy to link his bank accounts and provide that if the taxpayer chooses, there will be no TDS by the payer but 10% of the amount credited to his account will be frozen or directly credited to Government account till the end of the year so that the tax is computed and deducted from the bank account directly. This will save lot of work of the companies and will not involve any great work for the bank as it would be purely an arithmetic exercise which the computer can be programmed to do.
● The public profile and comparison with the private profile of the individual taxpayer is a system of voluntary participation in the USA. But it is being utilized to coerce the taxpayer in India which is a harsh measure. In fact when the Supreme court held that banks cannot be compelled to give information, it led to the introduction of Annul Information Returns. It means there is no trust on the taxpayer. Such an attitude does not auger well and is ethically bad as it encourages people to avoid the banking habit. Therefore it is better to give it up and instead, encourage the taxpayer to have transparent transactions and pay tax based on bank accounts by himself. There can be some incentives also by giving health insurance on such accounts. For instance Andhra Bank has a scheme of insurance for its account holders and BSNL gives personal accident insurance for all its subscribers.
● Taxes on unearned income is taken by way of dividend distribution tax as well as securities transaction tax. This can be fine tuned by introducing personal investment accounts with depositories which can maintain a consolidated account for all transactions giving transparency . Since the accounts will always be available with the depository there will be no need for the taxpayer to maintain the record. Cost of compliance will be substantially reduced.
● Since renting out property is taken as a service and assessed to service tax, it should be in the fitness of things to give up income tax on property income. It would also relieve people living on meager rents from tax burden.
● Capital gains is taxed moderately and is not included in the total income. So why not tax it separately through the registrar of assurances. It would reduce the need for filing returns. Capitals gains from movable assets such as financial instruments can also be collected directly from the financial institutions as in the case of NRI’s.
● Since we have the system of tax preparers, outsourcing the documents can be dispensed with by requiring the tax preparers to see the original documents in support of the returns and certify that the figures have been checked. After all the taxpayer is required to pay Rs 250 for each return and why not get some work from them on behalf of the department.
● Policies should be evidence based and such evidence must be disclosed. Consultative committees should be more active and should have such information to comment on.
● Income of a company is taxed at a flat rate. The problem is only the computation of the taxable income by making several adjustments. Why not accept the book profits and give up such computations when there is already the minimum alternate tax, if the taxable income is less than the book profits.
● Charitable Trusts apply their income to the same public purposes which the Government collects tax to perform. That is the justification for exempting charitable trusts from income tax. But once in a while the department feels that the tax that could have been paid by the trusts is lost and disallow the exemption either by amending the provisions or misapplying the provisions. The recent amendment withdrawing exemption for trusts carrying on business as part of the object of the trust is a case in point. It is arguable that that withdrawal is unconstitutional and even if it is not accepted it is an irrational denial of a human right.
● Finally it is disappointing when the Supreme Court does not treat tax matters with the priority it deserves. When High Courts admit writ petitions about the constitutionality of levies such as Fringe Benefit Tax and even grant stay, immediate disposal of the cases would be the appropriate course. The delay gives a chance to the revenue to plead that the amounts cannot be returned as they have been spent for public purposes defeating the judicial system itself.
24. CONCLUSION
We can very well appreciate that processing the returns is a tremendous task. In 2005-6 there were three crore returns of which assessees with less than 2 lakh income were 2.6 crores and upto 5 lakhs were 20 lakhs and upto 10 lakhs were 20 lakhs. Since the present approach is voluntary compliance, the revenue is left with the impression that either returns are not filed by those who are taxable or the returns filed are deceptive. Since it is impossible to scrutinize every one of those returns, attempts are made to randomly check them or to track escaped income. Failing in those two areas, the department falls back on squeezing those already in the net. There is a talk of replacing the Income Tax Act and then, I hope, that the chance will be taken to device a better system where taxpayers will be happy to keep their transactions transparent and painlessly contribute the tax. Thinking like a lawyer we are concerned with the process and not with the object, which we know is to raise revenue and cannot be avoided at all. Our main concern is only that the process of levying and collecting tax should be right in every way.
Let me end with how nicely a judge dealt with a clever advisor. A wealthy man had an advisor who told him to write a will and remember him in it. So the man wrote: “Let my advisor give what he wants to my family and take the rest”. When he died and the will was read, the advisor said I want to take all the wealth except ten thousand which I give to the family. So naturally the family went to court. After hearing the case, the judge said the adviser will take 10000 and the wealth will go to the family. The advisor said I don’t understand this conclusion. The judge said if we read the will correctly, it tells the advisor to give “what he wants” to the family that means, what he desires must be given to the family and he can take the rest. I hope the revenue will also give what they want to the people.
2008-06-28 Justice Rangarajan
[Ras Behari Ray Memorial Lecture delivered at Cuttack on 28th June 2008]