Though economic reforms started in 1991, tax reforms, somehow have not got the due attention. The architect of liberalization process the then Finance Minister Mr. Manmohan Singh made some attempt based on the Raja Chelliah Committee recommendations. His successors Mr. P. Chidambaram and Mr. Yashwant Sinha carried this forward a bit more in direct and indirect taxes. But the fact remains the reforms in this crucial area have been ad-hoc and root cause of the problem still remains.

Rightly Finance Minister Mr. Jaswant Singh set up Vijay Kelkar Task Force with the objective of rationalizing cumbersome tax structure in a bid to reverse deteriorating public finances, improve tax-GDP ratio by making tax administration simple, tax base wide with low tax rates.
Kelkar panel, which submitted its consultations papers on direct and indirect taxes separately, is justified in observing that the most direct way to raise tax GDP ratio is to remove most of the plethora of exemptions granted on import and excise taxes for a variety of reasons, mostly for non economic considerations; widen the indirect tax net by expanding the service tax base; and to improve taxpayers compliance.

To boost exports and FDI, the government must sharply reduce the transaction costs and the proposed indirect tax reforms are expected to reduce transaction costs by 50 per cent. Accordingly, it has proposed two-tier customs duty with 10 per cent for raw material imports and 20 per cent for finished products. It has exempted from duty life saving drugs, government imports for defence, security and atomic energy and RBI imports. Higher duty of up to 150 per cent has been recommended for specified agriculture products and demerit goods.

On excise, it has recommended again a two-tier system with 8 per cent rate for food products and 16 per cent for all other items. It has suggested removal of most of the exemptions but provided separate rates for agriculture products and tobacco besides zero percent duty on life saving drugs and security related items.Apart from total automation of tax administration, the panel on direct taxes has sought to move towards institution of a simple and transparent system, reduce transaction costs of revenue collection, alignment of incentives and widening the base.

Salient features of direct tax reforms is to remove all exemptions to savings and housing loans, increase the income tax exemption limit to Rs.one lakh, two-tier income tax of 20 per cent for income Rs.1-4 lakh and 30 per cent beyond Rs.4 lakh. Corporate tax has been suggested to be reduced from 36.5 per cent to 30 per cent. It has also suggested introduction of tax on the agriculture income of non-agriculturists. Mr. Kelkar, a former finance secretary who always maintains that the country has no time to waste in carrying forward reforms and believes that there has to be a big-bang approach on tax reforms as the present structure has in no way helped in pushing revenue collections substantially. But the question is whether there is a will to do away with exemptions, as it would be politically suicidal with elections to various State assemblies round the corner.

But none can deny the fact that the present structure breads corruption in the system and helps evaders, who take advantage of the loopholes in tax laws that are too complicated for layman giving ample scope for manipulations.Mr. Kelkar, a renowned economist with vast administrative experience in the Government is right in saying that the next 20 years are crucial to India for development and eradication of poverty.

The Task Force has justifiably reflected this approach in the consultations papers, giving broad thrust to simplification of tax policy, removal of anomalies, disbanding exemption raj and reduction in tax rates.Unfortunately, the inefficient tax system for the last 50 years has nurtured several vested groups, each of which wants to look at the tax structure only from his interest and certainly not from the broader interest of the society and nation.To cite an example that Kelkar Committee has suggested that agriculture income of non-agriculturists should be taxed and the farm lobby is up in arms and the Government appears to be defensive with widespread criticism about the proposals.

One of the banes of Indian tax system is the exemption and this has not only nurtured vested interests but has become a breeding ground for corruption besides narrowing the tax base. For example take the tax exemptions given to the charitable institutions. They say they should be given exemptions, as they should not be penalized for the social service like running hospitals and educational institutions, which the government ought to be running. There is some validity in the argument and there are several genuine organizations, which are doing yeomen service to the country. But at the same time there are several institutions, which have mushroomed only to take advantage of the concessions.

To deal with such situations, Mr. Kelkar has justifiably suggested that no tax exemptions be given to contributions to charitable institutions and instead government could give grant to genuine institutions, which could be monitored. Now what is happening is there is no record of how much money is collected and for what purpose. Also such exemptions have only increased paperwork of the tax authorities. By removing such exemptions, Government not only improves tax collections but also keep a tab on those institutions.

The broad thrust of the Task Force recommendations is in favour of simplifications of the tax policy, reduction of tax rates and removal of anomalies as well as improvement of administration of tax collection system. The proposed tax rental arrangement for taxing agriculture income is also welcome though it is beset with constitutional hurdles particularly from State Governments. As the whole structure is strongly designed to be revenue neutral, there should not be any quarrel with the proposals.But one month after the proposals have been made, there is a widespread criticism from several quarters. The industry is not happy. Though it welcomed the lowering of corporate tax and reductions in customs and excise duties, it is against removal of exemptions. Likewise the personal income tax payers too happy with the proposals to raise tax slabs but were critical of the move to do away with exemptions and concessions for savings and interest on housing loans.

Mr. Kelkar is right in saying that one could not have the cake and eat it too. If exemptions are there and tax base is narrow, the rates would have to be higher to mop up revenue. The falling tax-GDP ratio is a worrying factor and Government could not be taxing only a small section to generate revenue.Unfortunately, the vested interests are so well entrenched that their widespread criticisms have already forced both Finance Minister Mr. Jaswant Singh and Mr. Vijay Kelkar to go on back foot. Mr. Jaswant Singh has gone on record recently that Government could not go back on its commitment on certain exemptions like interest on housing loans, tax concessions to infrastructure projects. These are long-term commitments, which could not be wished away. Mr. Kelkar too has said there is some roughage, which needed to be smoothened.

Deputy Prime Minister Mr. L. K. Advani has said Government is not in agreement with some of the proposals of Kelkar recommendations. Because of the resentment two proposals are likely to fall flat. The proposals to withdraw tax breaks on housing loans and abolition of tax incentives for savings may not see the light of the day as they would be politically unwise. There are fears it posed the danger of falling savings are which the country could ill afford particularly when the government would have to mop up more resources for investments to achieve the ambitious eight per cent growth projected in the Tenth Five-Year Plan.

With Mr. Jaswant Singh observing that Government cannot renege on commitments made to the taxpayers and the exemptions given to promote employment and investment in the infrastructure sector, particularly housing, there is clear indication that these two proposals are unlikely to be accepted.These indications are also a pointer to the fact that the “big-bang” approach of doing away with all exemptions in one go would not be accepted. With so many objections pouring in. Kelkar Task Force recommendations would be yet another report likes Shome Committee that would gather dust in Finance Ministry’s shelves. As Mr. Kelkar has some clout in the ministry and also that he has been appointed by the incumbent Finance Minister, some of the recommendations may be implemented gradually. This would only give credence to the fears that reforms have taken a back seat.

Though Government claims tax reforms are high on agenda, it is certainly going to be caliberated, which means more time, perhaps three years or five years. If that is the case, there would only be tinkering of the tax laws in the forthcoming budget and the rationalization of the fiscal system proposed by Mr. Kelkar would perhaps have to wait for some more time. The people would have to be content with the moderate rate of growth for some more years.

By arrangement with Kaleidoscope