The Budget 2007 has many welcome features, such as the containment of the fiscal deficit and increased investment in education. But some provisions could throw up nasty surprises for taxpayers. Three features I didn’t like are:
Evaders or Innocents?
The Finance Bill 2007 has proposed tougher measures against tax evasion by tightening penalty provisions and overhauling the Income-Tax Settlement Commission procedures. The changes will come into effect from 1 June. Under the new system, tax evaders will have to pay a penalty of 100-300% of the evaded amount during search cases. This is a big change from the earlier practice which allowed evaders to buy time for settlement, without making a penalty upfront. Also, tax evaders will no longer be allowed to approach the Settlement Commission. While measures that make evasion tougher are welcome, the changes do not differentiate between a willful evader and someone who evaded unknowingly.
Dividend is nothing but distribution of post-tax profits of a company to its shareholders. The dividend distribution tax amounts double taxation and is not consistent with the philosophy of the 1997 Budget, which was also presented by P. Chidambaram. In his 1997 speech, he said: “Another area of vigorous debate over many years relates to the assessment of tax on dividend. I wish to end this debate hence I propose to abolish tax on dividends in the hands of the shareholders… Some companies distribute exorbitant dividends. Ideally they should retain the bulk of their profits and plug them into fresh investments. I intend to reward companies who invest in future growth. Hence, I propose to levy a tax on distribution of profits at 10% of the dividend. The tax shall be an incidence on the company and shall not be passed on to shareholders.” The tax was levied not as a revenue measure but as a disincentive to make companies invest in future growth.
Many of the changes made by this budget will be with retrospective effect. For instance, the definition of assessing officer is being widened retrospectively from 1 June 1994 to include the additional commissioner (AC). A better way to bring about these changes would have been to make them part of the new Income Tax Act to be tabled in Parliament this year.