This is what Finance Minister P Chidambaram recently said about the Kelkar Committee report on Direct Taxes: "I think it's a good roadmap. With some corrections to reflect the CMP, I think it's a roadmap that we can adopt."
In light of the renewed interest in the Kelkar Committee report, we take a re-look at some of the important recommendations it has made.
The Kelkar Committee first submitted its report in year 2003. It generated a lot of excitement and anxiety among individual and corporates alike.
Since then a lot of developments have taken place which will warrant some changes in the report. Then there is the requirement to conform to the broad guidelines laid out in the Common Minimum Programme of the ruling coalition.
Nevertheless, in light of the newfound support for the reforms suggested therein, it is an important document which needs to be well understood.
Personal Income Taxation
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The exemption limit for individuals and HUFs be increase to Rs 100,000 p.a. The proposed limit for senior citizens is Rs 150,000 p.a. Currently the exemption limit is Rs 50,000 for individuals (for senior citizens it is Rs 50,000).
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The structure for personal income tax should be revised to:
Income Level Tax Rates Below Rs 100,000 Nil Rs 100,000 - Rs 400,000 20% in excess of Rs 100,000 Above Rs 400,000 Rs 60,000 plus 30% of income in excess of Rs 400,000 The present structure has three slabs
Income Level Tax Rates Below Rs 50,000 Nil Rs 50,000 - Rs 60,000 10% in excess of Rs 50,000 Rs 60,000 - Rs 150,000 Rs 1,000 plus 20% of income in excess of Rs 60,000 Above Rs 150,000 Rs 19,000 plus 30% of income in excess of Rs 150,000
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Long term capital gains on listed equity shares should be fully exempt. Currently such gains are taxable either at 10% or 20% (with benefit of indexation). In case the long term capital gain is made on listed equity which is part of the BSE 500 Index, then no tax is levied.
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Dividends received from Indian companies should be fully exempt. Currently there is a dividend distribution tax of 12.5% (plus a surcharge of 2.5%).
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Standard Deduction for salaried individuals should be reduced to nil. Presently the structure for standard deduction is as follows -
Income from salary Deduction Less than Rs 150,000 Least of 40% or Rs 30,000 More than Rs 150,000 but less than 300,000 Rs 30,000 More than Rs 300,000 but less than 500,000 Rs 30,000 More than Rs 500,000 Rs 20,000
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The tax rebate on medical premium (subject to a ceiling of Rs 15,000; currently Rs 10,000) will be at the rate of 20% and capped at Rs 3,000. Presently for medical premium the rebate depends on the tax bracket you fall under. So if your marginal rate of taxation is 30%, then the benefit to you will be Rs 3,000 and if it is 10%, then the benefit will be only Rs 1,000.
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Tax rebate under section 88 to be eliminated. Special benefits given to senior citizens and women to be abolished. This will hit individuals the hardest as presently we benefit a lot from tax benefits that are linked to making investments in specified instruments.
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Benefits under section 80 L will be eliminated. Currently the benefit is capped at Rs 12,000 of interest income from specified instruments. Over and above this interest from government securities to the tune of Rs 3,000 is exempt.
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Exemptions under section 10 will be eliminated. Some incomes under section 10 which are currently exempt are agricultural income, accumulated income from providend fund and sum received (including bonus) under a insurance policy.
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Deduction of interest on home loan for acquiring a owner occupied dwelling will be reduced to Rs 50,000 pa. This limit is presently set at Rs 150,000 pa.
Taxation of Capital Gain
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Long term capital gains would be aggregated with other incomes and subjected to taxation at normal rates. Presently gains from sale of assets other than equity too are taxed as capital gains, which are lower than the marginal rate of taxation.
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Long term capital gains should continue to be exempt if invested in a house of in bonds of NHAI.
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While long term capital gains on equity should be exempt, short term capital gains should continue to be taxed.
Taxation of other entities
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Income of the mutual fund from short term capital gains and interest should be taxed at a flat rate at the hands of the mutual fund. The rate of tax should be 20%. Currently such gain is exempt from taxation. If this measure were to be implemented, returns from mutual fund schemes, which have high turnover ratios, would be impacted significantly.
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Dividends received by unit holders should be fully exempt. Currently, only dividends declared by equity schemes are tax free (there is no distribution tax).
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As is the case currently, Short term capital gains arising from the sale of units of mutual funds should be taxed at the individual level at the personal marginal rate of taxation.
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Long term gain arising to the investor from the sale of units of mutual fund should be exempt from tax. Currently capital gains from mutual funds are taxed.
Other Taxes
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Wealth tax should be abolished. Currently wealth tax is levied at the rate of 1% if the value of assets exceeds Rs 1.5 million (Rs 15 lakh).
Undoubtedly, the reforms proposed by the Kelkar Committee have wide ranging implications on the impact of tax on individuals. While it is uncertain how much of the impact of these reforms will be felt in the near term, one can expect that over the next few years tax reforms are likely to move broadly in tandem with what has been suggested.
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