NEW TAXATION PROPOSALS

Summary

In this Forum of Free Enterprise pamphlet, banker and classical-liberal commentator A. D. Shroff dissects Finance Minister T. T. Krishnamachari’s mid-year tax proposals of 30 November 1956, introduced to plug the widening gap in financing the Second Five-Year Plan. Shroff opens by setting out the deteriorating economic background: the rapid depletion of India’s sterling balances from Rs. 542 crores to a withdrawable balance of Rs. 142 crores within a year, the heavy import bill created by capital projects under the Plan, rising prices of foodgrains and cloth, and the freight and insurance shock from the closure of the Suez Canal. Against this background, he argues, the Government has finally been forced to admit that the Plan, originally pegged at Rs. 4,800 crores in the public sector, will now require Rs. 5,300 crores and roughly Rs. 1,300 crores of additional taxation rather than the Rs. 400 crores first envisaged. The Plan, he concludes, was ‘so formulated that it was not related to the realities of the situation in our economy.’

The speech then takes each new direct tax in turn. The extension of the penal super-tax on undistributed dividends — first introduced in the previous Finance Minister C. D. Deshmukh’s last budget and now made heavier — is condemned as a misreading of how industry actually accumulates capital. Calculating dividend obligations against paid-up capital rather than capital actually employed punishes precisely the prudent reinvestment of profits that built firms like Tata Chemicals over decades, and the harsh operation of Section 23A of the Income Tax Act risks crushing the very small and medium companies the country needs to encourage. The revived Capital Gains Tax draws an equally hostile reading: Shroff recalls that Liaquat Ali Khan had introduced it in 1947 and withdrawn it two years later for raising negligible revenue, and warns that taxing inflation-driven gains amounts to a levy on the capital base itself. Subjecting the compensation paid on nationalisation to capital-gains tax he calls ‘most inequitable.’ The third and ‘most serious’ proposal — compulsory deposit, requiring every company to lodge 25% of accumulated reserves and 75% of current surplus profits with the Government — is described as a ‘forced loan’ likely to provoke a serious monetary crisis and to apply, despite the Finance Minister’s assurances, even to banks, insurance companies and investment houses.

Shroff also flags the more technical but telling proposal to raise the stamp duty on Bills of Exchange eighty-fold, warning that the cost will pass straight into higher borrowing rates through the Usance Bill mechanism and burden the public at large. Drawing every strand together, he reads the whole package as evidence of ‘a definite and confirmed trend towards a gradual disappearance of democracy in the economic field’ — achieved less by overt nationalisation than by the insidious diversion of resources from the private sector to the public sector. The pamphlet closes on the warning that an authoritarian regime is being built up by ‘depriving the private sector of the resources that it has collected in the past.‘

Key points

• Speech delivered to the Democratic Group in Bombay on 30 November 1956, reacting to Finance Minister T. T. Krishnamachari’s mid-year tax package and republished by the Forum of Free Enterprise.

• Documents the collapse of sterling balances from Rs. 542 crores to a withdrawable Rs. 142 crores and the reluctant admission that the Second Plan would need Rs. 5,300 crores of public-sector outlay and roughly Rs. 1,300 crores of fresh taxation, not the Rs. 400 crores first laid down.

• Argues that the Second Plan ‘was so formulated that it was not related to the realities of the situation in our economy’, and that the resources and capacity to collect them simply do not exist.

• Critiques the extension of the penal super-tax on undistributed dividends as wrongly basing dividend obligations on paid-up capital rather than capital actually employed, thereby penalising prudent reinvestment that has built firms like Tata Chemicals.

• Calls for amending Section 23A of the Income Tax Act into three categories — investment, manufacturing and purely family-investment companies — so that small businesses and the first years of new industries are spared penal taxation.

• Reads the revived Capital Gains Tax as a tax on inflation-driven gains and the capital base itself, recalling Liaquat Ali Khan’s short-lived 1947 levy and condemning the application of the tax to compensation paid on nationalisation as ‘most inequitable’.

• Describes the compulsory-deposit proposal — 25% of accumulated reserves and 75% of current surplus profits to be lodged with Government — as a ‘forced loan’, the ‘severest blow to the private sector’, and likely to apply even to banks and insurers despite the Finance Minister’s reassurances.

• Reads the cumulative package, together with the proposed eighty-fold increase in stamp duty on Bills of Exchange, as a deliberate diversion of resources from the private to the public sector and a step toward an authoritarian economic order.