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KELKAR DILUTED

The consultation papers of Mr Vijay Kelkar have now become final reports. The direct tax consultation paper was the more controversial of the two, pushing generally for the removal of exemptions. This was especially true of personal income taxes, despite the task force arguing that the removal of exemptions and standard deductions was more than compensated by the lowering of rates and raising of the threshold to Rs 1 lakh a year. Since the agenda of the Bharatiya Janata Party is one of placating the middle class, it is not surprising that the deputy prime minister and the finance minister distanced themselves from the consultation paper. The Rajnath Singh committee, set up by the BJP to analyse Mr Kelkarís recommendations, described them as an electoral disaster. Given the flak, Mr Kelkar has diluted some of his original recommendations and thus their economic logic as well. In the transition from consultation paper to final report, the two slabs of 20 per cent (Rs 1 to Rs 4 lakh) and 30 per cent (more than Rs 4 lakh) remain. Surcharge and standard deduction will be scrapped, but there will be a conveyance allowance of up to Rs 7,600 a year. There are exemptions for housing, pensions, insurance, education and senior citizens, that for handicapped citizens having existed in the consultation stage. It is doubtful whether this is sufficient to placate the vocal urban middle class.

Hence, any prospect of these recommendations being reflected in the next budget is remote. Ditto for corporate tax proposals, more or less unchanged between consultation and final report. There may be some movement towards procedural improvements, including tax information network and better use of permanent account numbers. The proposal to tax agricultural income continues in the final report and with a threshold of Rs 1 lakh, 95 per cent of farmers will not be affected. But Parliament and political parties represent interests of large farmers rather than those of the small. So this is certain to be shot down. In the indirect tax case, the final report indicates greater deviation from the unification and harmonization argument in both customs and excise. This is the result of lobbying by chambers and industry organizations. The only worthwhile change in the final report is the acceptance of export incentive schemes other than duty drawback. Mr Kelkar may think that he has handled the political economy by diluting economic rationality in both the direct and indirect tax cases. But this is unlikely to be enough. Both sets of recommendations represent complete packages and there is also the danger that they will be partially implemented.

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