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Kelkar blames tax sops for high interest rates

New Delhi, Nov. 21: Vijay Kelkar, chairman of the task force on tax reforms, today defended the panel’s proposals to withdraw tax exemptions on savings arguing it would lead to a lowering of interest rates.

He reiterated the need for a uniform taxation structure across all sectors, choosing to ignore the industry’s demand for separate taxation systems for different sectors of the economy.

“A tax savings bond carries a higher interest rate due to the imputed costs of exemption compared with other instruments having lower rates, taking the real rates in the economy to a higher level,” Kelkar said on the sidelines of a workshop organised by the Confederation of Indian Industry (CII).

Elaborating on this, he said the interest rate on RBI relief bonds was approximately 9 per cent but, if the tax exemption is considered, the rate of return is more than any other bond where tax is deducted at source.

The differential rate of return was forcing other financial players to offer a higher interest rate on their bonds, which, in turn, raised the real interest rate in the economy.

“Such tax incentives might be rational at the micro-level but considering the overall higher interest rate structure in India compared with the international markets, it might be irrational at the macro-economic level”.

The basic rationale of the reforms proposed in the tax system by the task force on direct and indirect taxes was to promote growth, efficiency and employment in the economy by facilitating a reduction in costs across all sectors. Kelkar said money spent to increase tax compliance comprised 50 per cent of the transaction cost.

On the indirect tax front, rationalisation of customs and excise duties were likely to lower transaction costs for industry while removal of exemption in direct taxation would help lower high interest rates that are hampering investments.

“Any withdrawal of exemptions that hurt corporate income will be compensated by a simultaneous withdrawal of dividend tax and capital gains tax on shareholders. This will also safeguard the interests of small retail investors,” he added.

Responding to a query, Dipankar Chatterjee, member of the task force on direct taxes, clarified that the deduction on treatment of interest expense on borrowed capital will continue to be available.

According to the recommendations of the panel, benefits earlier available under section 36 (1) (iii) will now be available under section 37 of the Income Tax Act.

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