Constitutional Cap on Tax Rate
THE Congress Party wants a constitutional cap of 18% in the proposed GST, which the Government is not prepared to accept. "How can there be a maximum rate of tax fixed by the constitution?", is the point of the Finance Minister.
There is a precedent in the Constitution.
As per Article 276(2) of the Constitution, "The total amount payable in respect of any one person to the State or to any one municipality, district board, local board or other local authority in the State by way of taxes on professions, trades, callings and employments shall not exceed two thousand and five hundred rupees per annum."
So, there is a ceiling fixed by the Constitution. This issue was raised in the Rajya Sabha when the Finance Bill was discussed and again the Finance Minister strongly objected.
The FM said,
How did this 18 per cent cap and this idea of constitutional cap come? When Mr. Pranab Mukherjee, the hon. President today, introduced the GST, there was no cap. When Mr. Chidambaram referred it to the Standing Committee, there was no cap. When the Standing Committee's recommendations came, there was no cap. When you finalized those recommendations and went out of the Government, there was no cap. So, throughout the UPA, there was no cap as far as the GST is concerned. So, the cap never existed.
Now, suddenly, you say that there must be 18 percent cap provided in the Constitution itself. I have no difficulty with 18 per cent. I have no difficulty with the figure of 18 percent. Taxes must be reasonable. So, the idea of 18 percent is, if all the taxes of the Centre and States taken together, it should not be a very high rate of taxation, it should not exceed 18 per cent. But let me just assume a crisis situation. Now, there is a fallacy to have a uniform cap.
Situation one - there is a drought in the country, and five States come and say that they are suffering from drought and they need more money and more taxes. So, for one year, they want to charge 20 per cent. Are we then going to first amend the Constitution? And we all know how difficult it is to amend the Constitution? And, not only both the Houses of Parliament will amend it, but we will also send it to all the States to amend it.
The second fallacy of 18 per cent is that there cannot a uniform tax for all the commodities. You will have commodities which the aamadmi uses. We will say that it can be 6 per cent, 12 per cent, depending on the commodity. That is for the GST Council. Then, you may have luxury products. Should a BMW car manufactured in India be taxed only at 18 per cent? It should be taxed at much higher rate. Why do you want a Constitutional cap? A luxury product will have to be taxed at a much higher rate. Why do you want a cap in the Constitution?
The Article with a Cap - 276 : If I was asked to single out, and if you ask the Chief Ministers of the States to single out one provision of the Constitution, which deserves to be deleted forthwith, it is Article 276. If you want to know the history of Article 276, this is a problem where, in a Constituent Assembly, you have too many lawyers as Members. Because you had too many lawyers as Members, they never thought of the Scheduled Castes and the Scheduled Tribes, they never thought of the farmers, but they had one provision in the Constitution which said that a tax on professionals would have a cap of Rs.500. So, this came into the Constitution because of the overwhelming presence of the lawyers in the Constituent Assembly. And this provision is being cited by him and by my predecessor that this is the golden rule.
Two wrongs never make a right. Therefore, the sooner Article 276 is deleted, the better it is. I could understand having a Constitutional cap for any weaker section of society, but it is not correct to say that local authorities will not tax professionals beyond Rs.2,500, and in 2016, a Class-IV employee in the Government or in the private sector also pays more tax. So, to cite such a provision, which is a misconceived provision in the Constitution, as a precedent for the entire party's argument is not right. My submission to you is that if India needs to grow, we have to look at our capacity at reforming ourselves, bringing major tax reforms and every State has agreed. Therefore, please reconsider your position. I have no difficulty with the 18 per cent, but by putting an 18 per cent cap in the Constitution itself and surrendering Parliamentary and State Legislatures' jurisdiction on taxation to a Judge to decide, I think, the last of the powers left with the Legislatures itself would also be surrendered.
And the Finance minister is factually wrong when he said the cap was fixed at Rs. 500/-. It was only Rs. 250/-.
This Rs.250/- was enhanced to Rs. 2500 in 1988 by the 60th Amendment to the Constitution. The Statement of Objects and Reasons for the Constitution Amendment Bill stated,
Clause (2) of article 276 of the Constitution specifies that the total amount payable in respect of any one person to the State or to any one municipality, district board, local board or other local authority in a State by way of taxes on professions, trades, callings and employments leviable by a State Legislature under clause (1) of that article shall not exceed two hundred and fifty rupees per annum. The proviso to that clause, however, enables the continuance of the levy of such tax at a rate exceeding two hundred and fifty rupees per annum in any State, municipality, etc., if in the financial year immediately preceding the commencement of Constitution there was in force in that State, municipality, etc., any such tax exceeding that rate.
Some of the State Governments have represented that this celling of two hundred and fifty rupees which was fixed in 1949, needs to be revised upwards taking into consideration the price rise and other factors. It is also pointed out that the profession tax has, at present, become almost regressive because of the ceiling since even people with high salaries have to pay this tax at only the maximum amount of two hundred and fifty rupees per annum. The upward revision of profession tax will also help the State Governments in raising additional resources.
It is accordingly proposed to amend clause (2) of article 276 of the Constitution to increase the ceiling of profession tax from two hundred and fifty rupees per annum to two thousand and five hundred rupees per annum. As the proviso to this clause is no longer relevant, it is proposed to omit it .