The Telegraph
Since 1st March, 1999
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Tax panel roots for big bang option

New Delhi, Nov 2: The task force on direct taxes wants the BJP government to do what the United Front governmentís finance minister P. Chidambaram did five years ago: raise personal income tax exemption limit, lower corporate taxes and withdraw all corporate and personal income tax reliefs.

Finance ministerís advisor Vijay Kelkar, who presented the task forceís recommendations on direct taxes to Jaswant Singh here today, said he wanted the government ďto opt for a big bang approach ... we have given two options: one which allows a three-year phased plan and another a big bang deal. We are plumbing for the big bang.Ē

Kelkarís big bang option is to raise personal tax exemption limit to Rs 1 lakh while doing away with standard deduction, incentives on savings and tax reliefs allowed to women and senior citizens.

Two slabs would then remain: a 20 per cent tax slab for those earning between Rs 1 lakh and Rs 4 lakh and a 30 per cent tax slab for those earning above Rs 4 lakh. At present, there are three slabsó10 per cent for incomes ranging between Rs 50,000-Rs 60,000, 20 per cent for those earning between Rs 60,000 and Rs 1.5 lakh and 30 per cent for those earning above Rs 1.5 lakh.

Though the present tax exempt income limit is just Rs 50,000, salaried individuals now need not pay tax up to an income of Rs 1-1.2 lakh, taking advantage of the standard deduction of Rs 30,000, various tax-saving instruments as well as special discounts available to senior citizens and working women.

By recommending abolition of all exemptions except for the disabled and those with disabled children and a token Rs 4,000 towards medical expenses for the old, the Kelkar committee may well stir up a hornetís nest.

According to public finance specialists, Kelkar panelís recommendations, if implemented, will discourage household savings. It will also jeopardise the Tenth Planís target of raising the level of savings to 30 per cent of the countryís gross domestic product.

Politically, even more dangerous, is Kelkarís recommendation that farm income be brought into the tax net by getting the states to agree to let the Centre collect agricultural income tax on their behalf and then pass it on to them.

All farmers earning more than Rs 1 lakh a year would be liable to pay the tax. By distributing land holding among members of a family, a farming family could stretch this limit to something like Rs 4 lakh.

But even this could well prove to be politically sensitive in states like Punjab, Haryana and Uttar Pradesh, where the BJP and its key allies have much at stake.

What could prove to be more troublesome from the revenue-earning point of view is the Kelkar panelís desire to slash corporate tax down to 30 per cent from the present 36.75 per cent, exempt tax on dividends distributed by companies as well as end long-term capital gains and eliminate wealth tax.

Taxation on foreign companies would also come down to 35 per cent.

It also wants to reform the current minimum alternate tax (MAT) by doing away with the current system and instead tax zero-profit companies at 30 per cent of their book profit. This, if implemented, would hit companies like Reliance Industries hard and is likely to be resisted to the hilt by many corporate houses.

However, to balance revenue earnings, the committee wants to end all exemptions such as exemptions given to infrastructure industries, industries located in backward areas, environmental conscious businesses like processing of bio-degradable wastes, inter-corporate dividends, tea development, shipping.

Kelkar, possibly guessing the storm he would stir up with his drastic proposals, has also suggested a second option which suggests staggered reduction in corporate tax over a three-year period.

Possibly, the most non-controversial yet the most important suggestion is the setting up a tax information network (TIN) which would be outsourced from an organisation like the National Securities Depositories Ltd.

This TIN would keep track of tax deductions at source, check them with tax returns, PAN-enabled bank accounts and PAN-quoted high value purchases to give the income tax department a real time picture of each tax-payerís real income and tax deposits.

ďBy data mining TIN may well be able to, for the first time, bring to book all the neighbourhood lalas who have been evading taxes,Ē said economist Omkar Goswami, a member of Kelkarís panel.

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