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Can a govt tax anything?

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March 12, 2005 14:34 IST

Are governments free to tax anything they like? This question may have become important after the latest revenue-raising exertions of Mr P Chidambaram.

He has presented four Budgets so far--in 1996, 1997, 2004, and 2005. In three of these, he has managed to come up with revenue show-stoppers.

These were the minimum alternate tax in 1997, the securities transactions tax in 2004, and the fringe benefits tax in 2005 (not to mention the ill-conceived tax on cash withdrawals). By any reckoning it is quite an impressive record.

So either he has special talent in this direction, which is only to be expected from a man of his brilliance. Or, he sees his job mainly as a revenue-raiser who has to make it possible for his colleagues to spend their way to political bliss. His brilliance has been written about a lot, so I will focus on his seemingly permanent desperation for unconventional revenue.

As an aside, one ought to probably add that he somehow always manages to overestimate how much he is going to raise. This only seems to deepen his desperation, so that when the next Budget comes around he pulls another brilliant rabbit out of his hat.

There is also the tendency, as he calls it, to "set the bar high". This may be good management practice but where the good men from the tax departments are concerned, it causes major negative externalities.

On the one hand, it makes him a prisoner of tax officials. And on the other, perhaps as a result, it makes them even more rapacious.

It is this tendency, to tax on regardless, which leads to the question: are governments free to tax anything they like? And if so, are ever new taxes a measure of the finance minister's brilliance or of the government's desperation and arbitrariness?

The issue of whether governments are free to tax anything has come up often enough in history, not so much in ours as that of the Anglo-Saxon West, from which we derive our current political tradition. The most relevant history, of course, is British history, where even windows were taxed.

The tax continued until the mid-19th century. The struggle, however, had been going on since the 13th century.

And, repeatedly, it had been found that the sovereign could indeed tax anything. It has become one of those so-called inalienable rights--with a crucial difference: While such "inalienable" rights usually accrue to citizens, this one accrues to the State! It is surely an odd way of construing a right.

So in the first half of the 17th century, a situation arose in England when Parliament would not approve new taxes. The Kings started collecting revenue through means that did not require its sanction but which had the sanction of tradition.

Eventually, even though the Courts upheld their right to do so in two separate cases, one of them, Charles I, had his head chopped off after a bloody civil war. The moral was clear to his royal successors after the Restoration of 1660. They made sure that henceforth someone else would take the rap. Thus--more or less--was the office of the Prime Minister invented.

Anyhow, despite the judicial endorsements, the doctrine was not absolute. There were always checks imposed by Parliament or someone else. Occasionally even good sense prevailed.

Thus, although the sovereign was free to propose a tax on anything, Parliament had to approve how it was to be spent. In theory this is what is supposed to happen in India also. But in practice it doesn't because those who pay taxes and those who approve them are not the same class of persons.

To cut a long story short, what has evolved over the centuries is a compromise. This consists of the government's right to tax anything remaining unabridged and undiluted. In return, it makes an implicit promise that it will behave in a reasonable manner.

The question we have to ask therefore is whether the UPA government is likely to breach that compromise. Given its propensity to spend away to glory but not tax politically sensitive classes, not to mention its inability to prevent leakages caused by its own tax officials, I would say that the answer is yes. Mr Chidambaram has already pointed the way.

The Constitution is also very helpful to finance ministers in this regard. The operative clause is Article 248, which deals with residuary powers of legislation. As you might guess, it is a hand-me-down from the Government of India Act of 1935, which was a British device to retain as much power as possible in the Viceroy's Council.

It says: "Parliament has exclusive power to make any law with respect to any matter not enumerated in the Concurrent List or the State list." It then goes on to say that "such power shall include the power of making any law imposing a tax not mentioned in either of those lists."

Then, just in case anyone is left in any doubt, it has the amazing and infamous Entry 97 in the Seventh Schedule. This says the Centre can legislate on "any other matter not enumerated in List II or List III including any tax not mentioned in either of those Lists."

These wide powers have been frequently used. Equally frequently, they have been challenged. But whatever has been upheld or struck down has been specific to the tax in question on definitional or procedural grounds. The case law, as you can imagine, is immense.

But so far no one has challenged the general power to tax anything and everything. Nor have the Courts been asked to test the reasonableness of a tax.

But given the way our governments spend public money and given that those who legislate the taxes are not directly affected, not much anyway, the time may come when the Courts will be asked to lay down some principles that finance ministers would have to follow.

The reason is that Parliament, which is supposed to ensure the reasonableness of a tax, is no longer doing so. This gives finance ministers a completely free reign.

And that, I am afraid, simply won't do.

T C A Srinivasa-Raghavan