Opinion - Editorials

Retaining focus on reform

THE FINAL REPORTS of the two high-level task forces on direct and indirect taxes have retained the focus on simplicity and improved administration that were central elements of the consultation papers that had been put out for public debate. On the issues of tax rates and structure, however, the committees headed by Vijay Kelkar have moderated some of the proposals that were made earlier. But the substantial changes in the reports are more in indirect taxes, while the modifications that have been made in the rates, slabs and concessions in personal income and corporate tax will be perceived as not going far enough. Since it was the consultation paper on direct taxes which attracted so much controversy, including vociferous criticism from the Bharatiya Janata Party that saw in the proposals a threat to its supporters among the urban middle classes, the final report on direct taxes could prove politically unacceptable for the Government. The danger is also there that the Government will implement only the more acceptable elements of the package on direct taxes, although the task force has made it clear that the rationale of reform calls for recommendations to be implemented in their entirety and not in bits and pieces.

The Kelkar group has more or less retained its earlier thrust in direct taxes: a substantial hike in the exemption limit for income tax, a three-slab structure with a peak rate of 30 per cent, the abolition of almost all concessions on savings, an end to taxation of dividends and the inclusion of agricultural incomes above Rs. 1 lakh a year in the tax net. Three crucial changes have been made. Contributions to retirement schemes will now attract tax savings, interest payments on housing loans will continue to attract tax concessions (though at a lower ceiling of Rs. 50,000) and senior citizens will enjoy a higher exemption limit. While these are fairly major changes, they are not enough for groups that have got accustomed to enjoying much larger tax concessions. It is now up to the Government to convince the taxpayers that they will be better off — with a higher disposable income — if the recommendations are implemented as one package. The recommendations on corporate taxes are as radical as before — a lower tax rate, abolition of the minimum alternate tax and lower depreciation rates in conformity with the provisions of the Companies Act, all to be implemented in one fell swoop. The proposals on income tax may have received more attention, but it is the recommendations on corporate tax which go much further, close many loopholes and bring about some equity in tax payments by companies. The Government now has to demonstrate that it has the stomach for such tax reform.

In both excise and customs duties, the Kelkar task force on indirect taxes has now suggested a longer time frame for implementation and moderated some of the recommendations. A four and not three-slab structure has been suggested in excise. The lower average rate of a 14 per cent excise duty and the retention at a marginally higher rate of 20 per cent duty on motor vehicles, aerated waters and airconditioners are both sensible suggestions. In customs duty, the medium-term proposal is to move towards a four-rate structure (excluding the peak of 150 per cent on agricultural products and zero duty on life-saving drugs) as against the two-rate structure recommended in the consultation paper. This may be more acceptable to the Government, but since the import duty will be based on a classification of products into raw materials, intermediates, finished goods and consumer durables, there is ample scope for dispute about the rate applicable. The Government now has a couple of months (before presentation of the Union budget) to take a decision on the two Kelkar packages. If the multi-pronged attack from within and outside the Government on the consultation papers is anything to go by, the Government's response in what is likely to be the last budget before the next general elections is likely to be lukewarm.

© Copyright 2000 - 2009 The Hindu