Saturday, September 12, 2009

Law Street in The Economic Times (Sept 2009)

Dear Readers,

Governments across the world are indeed becoming more creative when it comes to levy of taxes. Reminds me of the old Beatles song.

Yes, anything and everything can be taxed. To read this column on the online edition of The Economic Times click here.

From sin tax to lifestyle taxes

• A new trend of lifestyle taxes is remerging across the globe
• The need to fill in treasury coffers has resulted in creative tax levies
• Periodic review of all new levies and regulations is a must

Tax professionals in India have been very busy lately. The budget was followed by the issuance of the Tax Code. Late nights spent dissecting the tax code, networking meetings, media appearances et al have left them exhausted. So, when Zenobia Aunty decided to call and ask: “Hey, what’s new?” she only heard groans.

Thus, Zenobia Aunty decided to have a look around much beyond Indian shores. We have heard of the phrase: Pop goes the weasel. Interestingly enough, this phrase has nothing to do with a furry little animal. It is just something that was shouted at random, in an old English dance. But, today, Zenobia Aunty is sure that the tax man out there in the United States is saying: Pop, goes the soda! Cheers.

Yes, lifestyle taxes are the in-thing in the United States. They don’t call them ‘sin taxes’ anymore, after ‘change’ is the new mantra. US Congress, while drawing up a bill as part of President Barack Obama's drive for health reform, has proposed a federal tax on soda, energy drinks and other sugary drinks to fund health care.

The revenue from the tax would help pay for obesity-related health spending, which reached $147 billion last year. Well, if you don’t want to cough up this tax, cut down your consumption and be healthier, seems to be message. Is it this simple? One wonders whether consumption of soda will really go down. Even as the debate rages on and lobbying by the software giants continues, September 1, marked the effective date for a steep increase on the taxation of candy and soft-drinks in Illinois State. In the past it was alcohol and tobacco that was targeted (including in India) today the United States seems to have moved on to explore other avenues, including marijuana as in California State.

Another move in the US Senate is to impose a 10% excise tax on cosmetic surgery. Perhaps it is taking a leaf from India, where cosmetic surgery was recently brought within the service tax net. Wanna-be Miss India’s or for that matter Wanna-be super models now have to pay through their nose. Quite literally!

While green taxes have been in vogue for quite sometime such as tax on use of plastic bags – made very popular in Ireland, lifestyle taxes are remerging. Green taxes have been used as both a carrot and stick. Carrots included higher sops to windmills or hybrid cars, sticks were instances such as heavy levies on use of plastic bags. But as regards lifestyle taxes, the trend is to adopt the stick approach.

One wonders whether this will serve the underlying purpose – such as ‘soda tax’ reducing obesity. Perhaps, it will not. But then, revenue authorities need to justify the need to fill their depleting coffers. Of course when the economy is bleeding carrots cannot be doled out. Else perhaps tax incentives for building walkways, parks, public gymnasiums and encouraging people to participate would have been a better answer than soda tax.

If the objective is to really reduce obesity and not merely to fill treasury coffers, then ‘sin taxes’ be it soda tax or otherwise must be periodically reviewed to see whether they are serving their intended purposes. Talking of periodical review brings Zenobia Aunty back to our Tax Code.

The need for a ‘change’ prompted issuance of our proposed tax code, after all our Income tax Act dates back to ‘1961’ with periodic annual amendments brought out by Finance Bills, down the years.

Zenobia Aunty has already commented earlier on some of the ‘finer points’ in this Tax Code, so she now prefers to speak in the wider context. “It is good that the government has decided to adopt the white paper approach. Only if it invites comments from all stakeholders, including corporate entities – both domestic and those dealing with India; will practical realities be factored in,” she adds.
But the government must not stop at white papers, alone. “Legislations must be periodically reviewed, practical grievances must be considered and amendments carried out immediately”, emphasises Zenobia Aunty.

The Tax Code should not be a one time exercise. Once enacted, periodical review is vital, as needs of the tax payers keep evolving. Zenobia Aunty’s request to the powers that be is: Do continue with the policy of issuing white papers for public discussions. However, once enacted do continue with the process of an open dialogue.

Hold open houses periodically, invite an assorted group of stakeholders for their views, listen to them carefully. Make immediate amendments if required, with retrospective effect if there is a genuine lapse in the provision. Only this mechanism will reduce the endless bouts of litigations that we face and lead to a more co-operative tax environment. There are so many instances that can come to mind, where periodic review and amendments would have helped the tax payers and the tax department. Best practices such as open houses must not be relegated just to the Tax Code, but must continue for ever.

Source of the photograph

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