Written in : June 1998

While everyone is discussing whether this government has a hidden agenda, let us discuss some catastrophes hidden in the Budget's tax proposals. Some changes proposed are so devastating and far reaching that it is surprising that there is not much uproar against them. These changes were also hidden, so to say, in the Budget speech of the Finance Minister. We shall discuss one change today and follow it up with more in the subsequent articles.

The Minister said in his budget speech that he was proposing abolition of the gift tax law as it was not a source of major revenue and its administration had become a burden. He also said that to plug leakage of revenue by people misusing the medium of gifts and avoid tax, he was proposing taxing gifts received as income. The changes proposed in the income tax law deserve attention.

To enable the changes suggested by the FM in his speech, the definition of income is now proposed to be amended. According to the proposed changes, any movable or immovable property received without consideration in money or money's worth would be considered to be income. This definition is to ensure that gifts received get taxed as income. What does the definition really mean?

What it means is this: if you receive any property (and this would include cash) for which you have not paid in money, it would automatically be considered to be your taxable income. This obviously includes gifts, but unfortunately it also includes much more.

These changes are so far reaching, as we shall soon see, that they virtually turn the law on its head.

Income tax law is meant to tax income - not every amount received by you. That is, it can tax income but not capital. This is a very fundamental tenet of income tax law. The difference between income and capital is very real and well recognised.

It is because capital cannot be taxed as income that gifts received were not considered to be taxable. Wherever legislature wanted a specific tax on capital it has legislated in so many words - like taxation of capital gains. However, these were exceptions and not the rule.

The proposed changes bring to tax all capital receipts. The entire law built on well settled and accepted principles is proposed to be turned over on its head and changed. The only considerations that would apply to decide taxability of any amount would be:

• that there was property (or cash) received
• for which no consideration was paid in money or money's worth.

It is not, if you notice, required that there should be a gift received, even if gift is one transaction which will be included.

What are the various transactions that can be now considered to be income? Let us understand from a few examples.

1. Your favourite political leader visits the city and his followers give him a purse collected from a large number of people. Tell him that the purse received will be his taxable income - even if he turns it over to his party.
    
2. You set up a new business in a backward or rural area. The state government gives you subsidy for doing so. It wants to encourage development of backward region and you want to cut down project cost. But the subsidy you may receive will be your taxable income - and you never thought it to be so!
    
3. A person dies without writing his will. His property passes to his heirs. Tell them that they have to first pay income tax on all the property received as if it were their income, and then keep the balance. Forget that estate duty was abolished long back. This is income tax.
    
4. A person dies in a rail accident, or in police firing in a riot. His widow is given 'compensation' by government. Tell her, if you have the heart, that she has to pay income tax on the compensation.
    
5. A person needs money for an expensive surgery of his very sick child. Some friends and charities give help so that he can save his child's life. But the amounts received will first have to bear income tax - the child's life can be saved later.
    
6. A taxi driver finds a left over bag from a passenger. He traces the passenger and hands it over to him. He is rewarded for his integrity and effort. The reward will be his taxable income.
    
7. You dive in after a drowning person and save his life. You are rewarded by the person. The reward will be your taxable income even if you are not a professional lifeguard and saving drowning people is not your profession.
    
8. A person dies while in employment. His wife is given ex gratia payment by the employer. Such an amount becomes taxable in her hands.
    
9. Your wife saves money out of household expenses you give her. These savings may be subjected to income tax.

   In all these examples, the properties have been received without consideration in money. And they, therefore, will be treated as income if the budget proposals pass through.

   Remember that these are but a small sampling - if dramatic - of the types of transactions that can be covered by the amendments. The list can be virtually endless. And no one can really make a comprehensive list of such transactions.

   Are these the type of transactions which are intended to be taxed to plug leakage of revenue resulting from abolition of gift tax? Is this what the very Honourable Finance Minister intended to do?

   Any person who understands basic tax laws will appreciate that the amendments are fraught with dangerous and devastating consequences. The changes have no business to be brought about. They deserve an immediate 'roll over'.

   More about other catastrophes in the next article.