1. Taxes

Whatever may be the form of the Govt. (Central, State or Local) it appears there is a sense of pride observed by the Legislative Authorities to impose New Taxes year after year. At times the type/nature of tax is beyond contemplation of an intelligent citizen of this country.

The Hon’ble Finance Minister Mr. P Chidambaram (FM) has in total presented Six Union Budgets (1996-97, 1997-98, 2004-05, 2005-06, 2006-07, 2007-08) which in itself is a record. However, in the process the Honourable FM has introduced, Seven New Taxes [viz., MAT, DDT, EC, STT, FBT, BCTT and the new 1% Secondary & Higher Education Cess]

2. Taxes collected by Government

It is estimated that total taxes collected by Centre for the year ended 31-3-2007 is 4.66 lakh crores (app). For details refer Table I given below. In addition:

• Sales Tax/VAT is collected by the State Governments

• Various other local levies are collected by State Govt./Local Bodies [For example, Octroi, Entry Tax, Stamp Duty etc.]

The Non Centre Taxes collection for the year ended 31-3-2007 can be estimated to be in excess of 1.50 lakh crores.

Though, the above is a reflection of growth in the India economy, the monetary amount is substantial.

TABLE I
CENTRE’S TAX REVENUES [Note 1]
[Rs. in crores]

Tax	2006-07	2005-06	2004-05	2003-04	2002-03
	(Note 2)
Corporate Tax	1,46,497	1,01,277	82,680	63,562	46,172
Income Tax	82,510	63,629	49,259	41,387	36,866
DIRECT TAX (I)	2,29,007	1,64,906	1,31,939	1,04,949	83,038
Customs	81,800	65,067	57,611	48,629	44,852
Central Excise	1,17,266	1,11,226	99,125	90,774	82,310
Service Tax	38,169	23,055	14,200	7,891	4,122
INDIRECT TAX (II)	2,37,235	1,99,348	1,70,936	1,47,294	1,31,284
TOTAL TAX (I+II)	4,66,242	3,64,254	3,02,875	2,52,243	2,14,322

Notes :	1. Source – Times of India, Mumbai 1-3-2007
	2. Revised Budget Estimates

3. Education Cess [EC]

While presenting the Union Budget for the year 2004-05 the following was observed by the Hon’ble FM:

Para 151 (Budget Speech)

Finally, there is the tax mandated by the NCMP. That is an education cess on all taxes. I propose to levy a cess of 2% on income tax, corporation tax, excise duties, customs duties and service tax.

Again while presenting the Union Budget for the year 2007-08 the following was observed by the Hon’ble FM:

Para 181 (Budget Speech)

I have a proposal regarding the cess for education. While the cess of 2 per cent on all taxes to fund basic education will remain, I propose to levy an additional cess of 1 per cent on all taxes to fund secondary education and higher education and the expansion of capacity by 54 per cent for reservation for socially and educationally backward classes.

One does appreciate that increased focus of Govt. expenditure on Education is laudable from the country’s long term betterment point of view.

4. Issues & concerns

The levy of EC on the taxes presently collected by the Central Government raises several issues and concerns, in particular, the following:

1. Constitutional propriety of EC levied on all Direct & Indirect Taxes collected by the Central Government for the purposes of meeting Education Expenditure, which is otherwise, a primary responsibility of the Union Government;
   b) Propriety of EC levy inasmuch as stated earler, it is estimated that approximately 4.66 lakh crores of rupees (est for the year ended 31-3-2007) were collected by the Central Government as taxes;

2. Propriety of EC levy inasmuch as it could have long term adverse precedent implications whereby the same could be extended to other areas of Govt. expenditure on education and other areas of social expenditure;

3. Propriety of the basis of EC levy inasmuch as the present tax paying sectors are being discriminated against Non – Tax Paying / Exempted Sectors of the country despite the fact that they generate substantial revenues like other Sectors:

• Agriculture

• SSI Sector (Manufacturing & Services)

• IT Industry

• Infrastructure Sector

• Units in Tax Free Zones

• Units in 100% EOU, STP, EHTP etc.

• Units in SEZ

5. EC levy has cascading effects where the incidence could be in excess of 2% [for example, levy on CVD which would consider Basic Customs Duty] resulting in an increase in ultimate costs and

6. Absence of satisfactory & transparent accountability mechanism to ensure that EC collected is expended for the specific purpose.

5. Justified circumstances

One does appreciate that, levies like EC could be justified, under extraordinary situations/ circumstances like Drought, Floods, Earthquakes, Tsunami etc

However, levy of EC as a regular tax, is Objectionable on grounds of propriety as well as Fairness.

6. Financial impact of EC

It is estimated that Govt has collected

Rs. 21,000 crores (app) towards EC from the people of this country up to 31-3-2007. It can be further estimated that total EC (2% + 1%) collection by the Central Government for the year 2007-08 could be in excess of Rs. 15,000 crores (app). Hence, the financial impact of EC, is substantial in monetary terms.

Budget papers do not give any particulars of the expenditure incurred against the EC collected in last 3 years; i.e., up to 31-3-2007. It is essential that, collection of EC and expenditure therefrom is subjected to an Independent Audit & Findings made public.

7. EC Calculations, Accounting etc.

Calculation, Accounting & Documentation aspects of EC [including the new levy] poses substantial hardship and practical difficulties to the trade and industry. This is, more particularly, in light of the fact that EC is required to disclose separately in the tax paying document for the purpose of availment of CENVAT Credit and its separate accounting is mandatory in terms of CENVAT Credit Rules, 2004.

It is understood that in some Standardized Computer Accounting System inclusion of new cess of 1% may not be possible.

8. Suggestions

1. Levy of EC as a regular tax requires serious re-consideration inasmuch the same is objectionable on grounds of propriety;

2. Basis of EC levy should be rationalized whereby all sections of the country (Tax Paying as well as Non – Tax Paying) are covered for the purpose of levy;

3. Satisfactory Accountability Mechanism (which should include Independent Audit) should be installed in order to ensure that EC collected is being expended for the specified purpose for which it is collected; and

4. Practical difficulties of Calculation, Accounting & Documentation need to be addressed.