This will be the first Budget of the new government and everybody expects it to be a taxpayer-friendly budget, to boost investment.
The Finance Minister has asserted that the businessman must reduce the cost of transaction to boost growth .I am outlining here how the Budget can be designed to help businessmen reduce cost from the indirect tax point.
Lately, the tax regime was geared to reach the revenue target by fair means or foul. The taxpayers faced a regime where the revenue target mattered and not the merit of the case. Rigid tax revenue target turned even good taxpayers bad.All show cause notices were confirmed, all appeals rejected before the commissioner and appeals filed against favourable Tribunal order before High Courts and Supreme Court indiscriminately.
The result was that the success rates in the Tribunals and Courts were 10 to 15 per cent between 2008 and 2011, as we see from the statement of the then minister of state for finance S.S. Palanimanickam, before the Lok Sabha on September 5,2012.
Litigation has become the rule rather than the exception. Even if the taxpayers win a case, refund is still a far cry. It is again rejected due to the Law of Unjust Enrichment (a welfare law) which creates another rigmarole of litigation on the ground of whether the benefit of higher tax has been passed on by the assessee to the consumer or not.
This law was passed in 1991 by amending Section 11 and Section 27 of the Customs Act. And the practice from 1878 has been thrown to the winds.
The Supreme Court upheld the constitutionality of the law in the case of Mafatlal Industries vs. UOI. But economic rationality was not dealt with in the very lengthy judgment. Legality is quite different from economic rationality.
Economically, the law cannot be justified because the law assumes (which is wrong) that a firm is always able to sell its products above its costs including duty .
Price does not have a direct correlation with cost all the time, it is determined by market forces depending on whether it is perfect or imperfect competition. In fact, the dissenting judge in the Mafatlal case has called the "doctrine of passing on the burden" quite absurd. It is right time to abrogate this retrograde law in this Budget like the Gold Control Act was done earlier.
If undue litigations are stopped by the government by announcing in the Budget that the government does not want undue revenue by coercion a great moral boosting will take place amongst the taxpayers.
There is a third method, namely, assuring certainty in the classification of the rate of duty. Giving a firm and certain ruling to the taxpayer will reduce the cost of transaction. This can be done through empowering the Authority of Advance Ruling (AAR), which is a closed chapter for manufacturers and importers once they have started manufacture and import.
But it is only then that the big hand of the government starts coercing them. Now, only the proposed activity is covered. There is scope to cover an activity, which has started but there may be doubt about its classification.
It may be that the importer has already imported something paying a certain rate of duty. If he thinks there is doubt about it, he should be able to ask for a ruling on the existing import, if no show-cause memo has been issued.
For this purpose, the definition of advance ruling in section 28E (b) will have to be amended suitably. Catholics in the Department may not support it saying that in that case the meaning of "advance" gets diluted. But once amended, the word "advance" will mean different. It will be an artificial ruling.
So I give here three suggestions for reducing transaction cost of importers and manufacturers:
(i) Budget should state clearly that fiscal deficit will not be bridged by coercing taxpayers wrongly and throwing them into undue litigation
(ii) The welfare law should be abrogated
(iii) Certainty of classification should be assured by allowing AAR to give ruling on the rate of duty to indigenous manufacturers or importers so long as show cause memo has not been issued.
smukher2000@yahoo.com
