The Hindu : Kelkar panel report unlikely to be accepted

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Thursday, Nov 07, 2002

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Kelkar panel report unlikely to be accepted

By Alok Mukherjee

NEW DELHI NOV. 6. There are few takers in the Government for the two draft reports submitted by Vijay Kelkar, Adviser to the Finance Minister, Jaswant Singh, on direct and indirect taxes.

Not only do the reports seem to be undoing all measures of taxation reforms undertaken in the last 10 years, there is also an apprehension that the recommendations could turn out to be `political hot potatoes' because they could undermine the Prime Minister's ambitious road development projects and even the Tenth Five-Year Plan, both of which the Prime Minister has been keenly pushing.

Sources in Government point out that in the case of direct taxes, the Kelkar Committee recommendations seem to reverse the systematic attempt in the last 10 years to widen the tax base. This has resulted in the number of tax assessees going up from around 70 lakhs in the early 1990s to around 2.5 crores at present. But an increase in the income tax exemption limit to Rs. 1 lakh would result in the bulk of the assessees going out of the tax net. Consequently, the burden of contributing revenues would fall on a smaller percentage of taxpayers who would have to pay more over the years to keep up with the Government's intention of raising the tax-GDP (gross domestic product) ratio in order to correct the fiscal imbalance of the Centre and the States.

The Kelkar Committee seems to have underestimated the impact of its recommendation for the withdrawal of almost all savings-related income tax exemptions. Since these exemptions influence domestic savings very significantly, their withdrawal could impact the overall savings projections for the Tenth Plan period which has factored in domestic savings at 26.84 per cent of the GDP, very much higher than the 23.31 per cent achieved in the Ninth Plan. If there is a shortfall in savings, the Tenth Plan's investment projections would go awry. The States are also likely to protest the withdrawal of savings-related tax exemptions since small savings play a very significant role in financing State Plans. Any drop in these savings would severely impact the precarious fiscal position of the States, the sources say.

The committee is also being faulted for not building in the political cost of abolishing savings-related tax exemptions. Since most of these exemptions are addressed to the middle class, this recommendation could turn out to be `politically volatile' as happened in the case of Yashwant Sinha who attempted to withdraw some of the tax concessions in February this year and had to pay a price by moving out of the Finance Ministry. For Jaswant Singh to accept similar recommendations seems unlikely, especially in the light of the BJP's internal analysis that Mr. Sinha's endeavour cost the party heavily during the last Assembly elections.

The recommendation for the abolition of wealth tax too has political overtones. While it yields little revenue, the abolition of wealth tax, which by its very nature is aimed at the rich, and withdrawing tax exemptions enjoyed by the middle class could be seen as a tilt in favour of the rich and against the middle class.

What the Committee could have considered instead was the introduction of an income tax slab of five per cent at the lower levels of income so that fresh income earners could be brought into the tax net. Then, with growth in the overall GDP and per capita income, those in the lower slabs would graduate to the higher slabs, and the Government could expect higher revenue while at the same time ensuring a steady flow into the tax net. Another proposal is for having a final slab higher than 30 per cent on high income levels of Rs. 10-20 lakhs a year. On indirect taxes, the charge against the committee is that it would undo the attempts to make the indirect tax regime less complicated. The committee instead proposes the creation of more and more excise and customs duty rates which would not only clutter up the system but would also make it difficult to administer.

There is also an implicit suggestion in the report to withdraw any cess on excise duties and impose only the central excise rate. Currently, a cess on petrol and diesel is being used to finance the Prime Minister's National Highway Development Programme as well as the rural roads programme. These massive programmes require huge funding, and based on the projection of cess collections in future years, advance borrowings have already been undertaken for these projects. A withdrawal of the cess would lead to a collapse of these projects, the sources say.

With such adverse opinion coming out from within the administration, the Kelkar reports are unlikely to be accepted, unless the proposals are drastically altered in the final reports.

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