Freebies, or a sensible tax policy?

In recent years, the presentation of the Union Budget has always a triggered a controversy over whether the Government is unduly benign towards the corporate sector even as it comes down heavily on farmers and the poor. As the argument goes, the Government grants freebies of various sorts and extends all manner of tax concessions to the corporate sector but baulks at granting fresh doses of loan waivers for the farmer or goes about aggressively pruning subsidies on food for the poor.

The annexure (Annexure 15) to the Receipts Budget of the Government is convenient fodder for the ‘Oh, the Government is soft on corporates’ argument. The Government doesn’t help its cause by not giving a more nuanced explanation of the data contained in that document when it talks about ‘Revenue foregone’ under the Central Tax System. The statement seems to suggest that the Government has chosen to forego taxes that are legitimately due to it.

In 2012-13, the latest year for which the Government has put out the relevant information on actual numbers, corporate concessions cost the Government roughly ₹5.6 lakh crore. Those who criticise the Government for such extravagance towards the corporate sector would be largely accommodative of the latter’s desire to please the ordinary, individual taxpayer with some concessions (senior citizens, anyone?) which, let it be said, while not as large as for the corporate entities, nevertheless cost a pretty penny. But that is another story.

Let us look at the sum under the head, ‘indirect taxes’ which account for the bulk of these so-called corporate concessions. The sum total of such giveaways in 2012-13 as mentioned in the annexure to the Receipts Budget for the fiscal year 2014-15 is ₹4,63,979 crore. This comprised ₹2,09,940 crore by way of excise duty that the Government abstained from collecting and another ₹2,54,039 crore in customs duties that the Government was entitled to collect, but chose not to.

The key question is this: Does the Government actually refrain from collecting taxes that are legitimately due? The reality is a bit more complex than a straight ‘yes’ or ‘no’ answer could offer.

Take the case of excise duties lost due to these so-called corporate concessions. This amount is computed on the basis of the rate of excise duty that is actually levied on various excisable goods that were manufactured in a particular year and the rate of duty mentioned in the Central Excise Tariff Act as the ‘tariff rate’ applicable to each class of goods. Since no taxes can be collected unless there is a parliamentary sanction, it is in effect telling the Government, “I hereby authorise you to collect excise duties at the ‘tariff rate’ mentioned in the Act”.

But in the same breath, Parliament by a separate legislation (Central Excise Act 1944) also stipulated that the Government may prescribe lower rates than those mentioned in the Tariff Act if the latter deemed them to be in the public interest. In effect, the clauses in the two separate legislations taken together mean that the Parliament-approved rate for any excisable good is the rate notified by the Government as the applicable rate on that good rate at any point of time. In other words, the rate levied on a particular good is the rate that Parliament believes to be the statutory rate (for that moment, of course) and it is this rate that is attracted when a manufacturer produces those excisable goods.

Viewed thus, there is only one rate and it is that rate which is imposed as excise duty and hence by extension there is no concession or governmental largesse involved in the arrangement. Thus if the Tariff Act stipulates 40 per cent as the excise duty applicable on the manufacture of cars and in exercise of the power conferred by Parliament on the Government, a rate of 24 per cent is notified, it means Parliament intends to levy only 24 per cent of the value of the car as excise duty payable on it and it is that which is imposed on the company manufacturing it and hence there is no concession. It is a fundamental principle of principal-agent relationships that an act undertaken by an agent in exercise of the delegated authority conferred by the principal is an act of the principal himself. The notification by the Government of a rate of excise duty on cars at 24 per cent is in fact a rate stipulated by the legislature of that order. If there is only one rate, both in a de facto and de jure sense, there is no forbearance and hence there is no question of any sacrifice warranting it to be labelled as a ‘freebie’ or a concession.

Of course, you could argue that the activity of manufacturing of cars should attract not just 40 per cent but in fact something steeper, say, 60 per cent. But that is another matter altogether.

This is not some legal sophistry designed to mask a corporate concession to look like something that is fair and square. There is an additional factor as to why Parliament confined itself to stipulating a ceiling rate for excisable goods but otherwise had been agnostic as to the actual rate charged by the executive authority. Rates of indirect taxes have to be structured in such a manner that they can be varied up and down in tune with the changes in the external environment, both economic and political, without having to seek parliamentary approval every time the rates are so revised.

In a globalised world, such exigencies are all too frequent. Should hostilities break out between India and China and the Government needs to mop up additional resources, an excise duty hike becomes inevitable. Similarly, if there is a slowdown in the economy, as happened two years ago, the Government needs to stimulate demand by reducing the excise duties.

None of these contingencies should have to wait for Parliament to be convened and rate modifications approved. A similar situation can be conceived of for changes in customs duty as well. In other words, the differences between ceiling rates prescribed under the law and the actual rates charged in tune with economic realities shouldn’t be viewed as largesse granted to the corporates.