Income Tax - Now Sushil Modi Wants amendment to Section 40 Scrapped
THE existing provisions of section 40 specifies the amounts which shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”. The non-deductible expense under the said section also includes statutory dues like fringe benefit tax, income-tax, wealth-tax, etc.
Disputes have arisen in respect of income-tax assessment of some State Government undertakings as to whether any sum paid by way of privilege fee, license fee, royalty, etc. levied or charged by the State Government exclusively on its undertakings are deductible or not for the purposes of computation of income of such undertakings. In some cases, orders have been issued to the effect that surplus arising to such undertakings shall vest with the State Government. As a result it has been claimed that such income by way of surplus is not subject to tax. It is a settled law that State Government undertakings are separate legal entities than the State and are liable to income-tax.
In order to protect the tax base of State Government undertakings vis-à-vis exclusive levy of fee, charge, etc. or appropriation of amount by the State Governments from its undertakings, the Finance Bill 2013 proposes to amend section 40 of the Income-tax Act to provide that any amount paid by way of fee, charge, etc., which is levied exclusively on, or any amount appropriated, directly or indirectly, from a State Government undertaking, by the State Government, shall not be allowed as deduction for the purposes of computation of income of such undertakings under the head “Profits and gains of business or profession”.
The Finance Bill 2013 defines the expression “State Government Undertaking” for this purpose.
This amendment, after enactment, will take effect from 1st April, 2014 and will, accordingly, apply in relation to the assessment year 2014-15 and subsequent assessment years.
Some State Governments are obviously not happy with this situation. As usual it was Amma Jayalalithaa who raised the first voice of dissent. In a letter to the Prime Minister (she hardly recognises the Finance Minister), she wrote,
"I am dismayed to find that the Finance Bill 2013, introduced in the Lok Sabha along with the Union Budget for 2013-14, contains an extremely retrograde, anti-federal provision in Clause 7 of the Bill. This clause seeks to amend section 40 of the Income Tax Act and make any levy by a State Government by way of privilege fee, license fee, royalty etc., on State Public Sector Undertakings not deductible for the purpose of computation of income.
States have the powers to levy such fees, royalties etc. under Article 265 of the Constitution read with the relevant entries in List 2 of the Seventh Schedule. All such levies are legitimate statutory levies and as such were deductible from the income of the State Public Sector Undertakings under Section 37 of the Income Tax Act.
Clause 7 of the Finance Bill 2013, now seeks to make such statutory levies non-deductible from the income of State Public Sector Undertakings and thereby intends to boost the income of the Central Government at the cost of legitimate tax and non-tax revenue of the State Governments. This amounts to an indirect taxation of the income of State Governments and hence is violative of the spirit of Article 289 of the Constitution which exempts the property and income of a State from Union taxation. This provision is also discriminatory because this only subjects State PSUs to such non-deduction of State Government levies but not Central Public Sector Undertakings. Further, the clause as presently worded also gives very wide discretion to Income Tax Authorities to determine which levies will not be permitted for deduction and these powers can be exercised in an arbitrary manner which will lead to needless litigation.
I am disappointed to note that the Ministry of Finance, instead of focusing on curbing tax evasion by a large number of private persons and increasing the tax base by such means, is attempting to act against the Constitutional scheme of distribution of taxation powers between the Centre and the States and to distort the federal polity of the country. The legitimate expenditure on statutory levies of State Public Sector Undertakings which declare their incomes openly and are subject to audit by the Comptroller and Auditor General of India and whose annual reports are subject to scrutiny by State Legislatures is sought to be disallowed. Clearly this provision is ill-conceived and misguided and has no place in a federal polity like ours.
I would, therefore, earnestly urge you to kindly ensure that an official amendment is moved to delete Clause 7 of the Finance Bill 2013 before the Finance Bill is enacted into Law in Parliament."
Now Bihar finance Minister Sushil Modi who is also Chairman of Empowered Committee of State Finance Ministers on GST has in a letter to the Finance Minister wants the provisions scrapped. Modi says in his letter,
The proposed amendment amounts to imposition of tax on State Government's income and therefore violates Article 289 of the Constitution of India.
You are aware that States are already agitated by some of the actions or inactions of the central government on the issue of compensation of introduction of Value Added Tax (VAT). The proposed move will further erode the confidence of the state governments and delays the introduction of GST .
A great opportunity for the FM to yield to Amma and Modi!