Sukumar Mukhopadhyay: Budget: Bury the ghost of unjust enrichment

In the present context when the Revenue department is so keen on realising arrear of revenue, one dexterous move, which is sure to produce good result will be to abolish the law of unjust enrichment. This law provides for not giving refund if the tax payer does not prove that he has not passed on the benefit of refund of money (which is yet to get) to the consumers. Since the law has come, getting a refund has been practically impossible. On the plea of unjust enrichment, the tax payer is made to run from pillar to post. This has rightly led the tax payers to believe that once they pay the extra tax, they will never get it back even if they win the case at the refund , appellate or higher stage. That is why they resist the payment of the arrear, which they believe is not due to the government.

Let me explain what this law is. This was introduced as a Welfare Law at the instance of the communists when they were heading the Public Accounts Committee. The idea was that if a tax payer pays higher duty, though he considers that the duty should be lower, he pays the higher tax, but gets the refund. The Welfare proponents thought that while fixing the price of the goods, the tax payer might add this refund (which is due in future) to the price so that when the goods are sold, the refund (which he is yet to get) is already realised. This should mean that when he gets the refund, it will be an unjust enrichment for him. To stop it, the Welfare-proponents wanted to bring a law that the refund will not be given unless he is able to prove that he has not passed on the burden of the extra duty to the consumers. The Parliament agreed and the law was passed.

This law was made in 1991 by amending Section 11 and Section 27 of the Customs Act. And the practice from 1878 was given a go by. The same was done for the Central Excise and Service Tax also. The Supreme Court upheld the constitutionality of the law in the case of Mafatlal Industries vs. UOI . But whether the law was good ecomically was not dealt within the very lengthy judgment. Legality is quite different from the economic rationality. Economically the law cannot be justified on considerations, which are discussed below.

A. The law assumes that a firm is always able to sell its products above or equal to its costs and duty paid. Had it been really so there would not have been so many companies in the BIFR.

B. Price has no direct correlation with the cost all the time . Price is determined by the market forces depending upon whether it is a competitive or monopolistic or oligopolistic or monopsonistic situation.

C. In communist philosophy, profit is a stigmatising word. It is not so if the economy has to run in the capitalistic line as India has to do now. Profit is the engine of growth.

D. Japan, America, Canada and Europe are not having this sort of anti-profit law. Can Indian businessmen compete with them living in such a pseudo-socialistic and populist economic straitjacket?

E. This subject has become highly litigated. Innumerable cases are being fought at different levels. Some issues have been pending with the Constitutional Bench of the Supreme Court since the judgments by several benches differed.

Conclusion: The dissenting judge in the Mafatlal case has called the “doctrine of passing on the burden” quite absurd. The law of barring unjust enrichment may be constitutional but it is not economically sound. The Gold Control Act was constitutional but it was found to be economically redundant and was scrapped in the late 1980`s. Now the time has come for the well-deserved demise of this law also. Both the Partho Shome Committee in May 2001 and the Kelkar Committee Report, 2002 have commented on the adverse effects of this law. It is the right thing to do for the economists in the Finance Ministry to decide about the abolition of this retrograde law. On their own, the bureaucrats will never do it.

Email: smukher2000@yahoo.com