The Kelkar Committee recommendations, popularly known as the Task Force on Direct and Indirect Taxes, have been suggested by a committee headed by Dr. Vijay Laxman Kelkar, advisor tot the finance minister.
Following pressure from the middle class and the BJP, the watered-down version of the Kelkar Committee report, tabled on 2 November 2002, suggests sweeping changes to the tax system and are likely to form the key input for the preparation of the forthcoming Union Budget for 2003-04.
The basic objective of the Kelkar Committee was to arrive at long-term sustainable solutions to enhance transparency, reduce transaction costs, promote growth, improve tax compliance and to increase the tax-to-GDP ratio through a world-class fiscal regime. The report largely focuses on the simplification and rationalisation of tax laws and to impart a greater transparency in tax administration.
However, the general view on the report, which has been out for over 3 months now, is that the recommendations are in line with the present economic policy of rewarding the rich with tax cuts, while putting the burden on the middle class and common people.
The report aims at widening the tax net by expanding the service tax base and improving the tax-payers' compliance. That justifies why the committee tampered with personal taxes to such an extent. Bringing more people under the tax net is, no doubt, important as less than 2% of our total population currently pays taxes. But wasn't just simplification of tax structures and widening of tax base enough, rather than increasing the tax rates.
The report favours scrapping important sections, like section 88, section 80L and section 10, available to individuals, except for handicapped and women over 65 years. If these recommendations are accepted, tax-payers can no longer obtain exemption on interest income received from bonds, securities and debentures u/s 10 and the tax exemption u/s 88. The removal of section 80L will make investments suffer to a great extent.
The report further suggests abolition of standard deduction for incomes below Rs 5 lakh and the continuation of tax exemption on conveyance allowance with a ceiling of Rs 9600 per annum. The only concession the report provides is the continuation of deduction for contribution to pension funds run by LIC or private players. In fact, the ceiling for this deduction has been raised from Rs 10,000 to Rs 20,000.
The report aims at removing the tax burden on capital gains in equities. So only the capital gains on the sale of debt and property investments will be taxed.
As in the past couple of years, the middle class has been bearing an increased tax burden, it has been under-reporting its income. This, the report claims, has led to a stagnation in the tax-to-GDP ratio in the second half of 1990s. In view of this, the peak rates of direct taxation have come down more sharply for the upper income groups rather than the tax-paying middle income group.
A positive feature of the report is that the basic exemption limit in income tax is expected to be raised from Rs 50,000 to Rs 1 lakh. Further, instead of the current three, a structure of two slabs has been proposed in personal income tax 20% for those earning between Rs 1-4 lakh and 30% for those above Rs 4 lakh. A welcome step is that the panel has recommended to process tax returns in four months instead of one or two years and provide tax refunds directly through a bank.
Though the report puts a dampener on personal taxes, the corporate sector will stand to gain from the proposals. Kelkar believes that India's sagging economy can be revived only by boosting the corporate sector.
The report favours a reduction in the corporate tax rate from 36.75% to 30% for domestic companies and 35% for foreign companies in the next three years. The minimum alternate tax of 7.5% on book profits will also be taken off.
In terms of housing, the report suggests that the tax exemption on the interest portion of a housing loan be reduced from Rs 1.5 lakh to Rs 1 lakh in 2003-04, Rs 50,000 in 04-05 and nil in the following year. This, if accepted, it will affect the construction industry and also have a multiplier effect on cement and steel.
In housing, the committee offers two options. One, incentivise borrowings by a 2% interest subsidy being provided by the National Housing Bank (NHB) on loans below Rs 5 lakh. Two, reduce the amount of mortgage interest deductible for taxable interest purposes from Rs 1.5 lakh to Rs 50,000.
In terms of indirect taxes, the report suggests a plethora of exemptions granted on import and excise taxes. Most importantly, it recommends two rates of excise duty 16% and 8%. It also suggests the removal of multiplicity of levies by only retaining three types of duties basic, countervailing duty and antidumping duty. The report aims to organise the current multiple customs duty structure under a two-tier structure of 10% for raw materials and 20% for finished goods by 2004-05.
Further, to rationalise excise duty rates, it favours the removal of special excise duty of 8% and 16%, levied over and above the 16% Cenvat, and the introduction of Value Added Tax (VAT). The peak rate of customs duty should have a gradual reduction from 30% to 5%, by slashing 5% every year. Duties should be reduced to 5% for basic raw materials and 8% for intermediate goods.
It also aims at reducing the number of products on which the rate of customs duty is nil, and confining this to products of strategic importance, such as life-saving drugs and equipment. On the remaining products, it recommends a charge of 5% customs duty.
The report recommends a 20% excise duty for motor vehicles, air-conditioners and aerated water, and a 6% duty on processed food products. It further recommends raising the excise duty on kerosene by Rs 1 per litre and the exemption of excise duty on bulk tea. It recommends a custom duty of 8% on crude oil and 15% on petroleum products.
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