The author is director, Rajiv Gandhi Institute for Contemporary Studies, New Delhi
We now have reports from the task forces on direct and indirect taxes. They are no longer consultation papers. Since so much has already been written about Vijay Kelkar and his recommendations, I won’t bother about the big picture. Instead, let me give you little bits of information from the reports. These are too unimportant for the media to mention. Hence, unless you have read the reports yourself, you are liable to have missed these.
First, direct taxes.
In response to the consultation paper, there were 1,500 e-mail messages. There were more than 200 op-ed and other articles in English language newspapers. Different organizations submitted 100 memoranda. A general reaction was that the tax reforms proposed didn’t have a human face, such as concerns of housing, senior citizens and old-age income security. “On a personal note, this was also the unanimous advice of the spouses of the Task Force members.”
Now you know why the dilution took place. You should take a look at Table 1.1, which was missing from the consultation paper and which only some newspapers have reproduced. Using the Central board of direct taxes database, this shows that incidence of personal income taxation will drop across all income groups. This should allay some of your fears. And a large part of the thrust in Kelkar is simplification and transparency.
There is a National Institute of Public Finance and Policy study (quoted in the report) that shows that compliance costs are estimated to be as high as 48 per cent of taxes paid. You should also take a look at Table 4.9. This is not a new table. It also existed in the consultation paper and is reproduced from the Y.V. Reddy committee’s report on administered exchange rates. Adjusted for all tax concessions, this table gives the effective return on things like national savings certificates and public provident funds.
The return on national savings certificates is between 15.78 per cent and 18.38 per cent, while that on personal provident fund (without withdrawal) is between 13.78 per cent and 16.89 per cent. With withdrawals, the return on PPF is more. Poor people don’t invest in NSCs or PPFs. Therefore, we should ask the question — are such high returns necessary or justified' Who bears the costs of such high returns'
The backlog of returns in September 2002 is 28 million. The number of income tax assessees is now (April 2002) 34.4 million, up from 8.9 million in 1990-91. However, there is some confusion about this figure, since CBDT thinks the figure is 30 million. The increase is largely because of the one in six scheme. “The argument that the bulk of the income tax revenues are contributed by the salaried taxpayers is driven by perception rather than facts. On estimate, salaried taxpayers contribute only about 35 per cent of the personal tax revenues; the balance 65 per cent is contributed by the self-employed.”
On reducing transaction costs, “At present, taxes are collected through approximately 10,500 bank branches. Since the proposed procedure requires banks to receive online payment, those banks that do not have adequate infrastructure for establishing online connectivity will be debarred from collecting taxes.” You won’t need income tax clearance certificates before leaving the country.
There is a long section on promissory estoppel, missing in the consultation paper. According to law dictionaries, promissory estoppel “ordinarily refers to the situation in which a plaintiff seeks recovery for loss or damage suffered as a result of relying on the defendant’s promises or representations”. That is, by changing policies, the state is effectively going back on a contract and this is illegal.
Apparently, this section on promissory estoppel was inserted because of comments received from the corporate sector. The corporate sector will understandably lobby, especially about Sections 10A, 10B and 80IA, 80IB of the Income Tax Act. But as the corporate sector knows (or should know), the doctrine of promissory estoppel doesn’t apply to tax policy. On 80IA and 80IB, “such benefits only helped to camouflage the under-performance of corporate managers. These benefits did not protect the shareholders; the dividends distributed from exempt profit were also taxable along with long-term capital gains. Further, these have also been a source of both abuse and a large number of litigations, increasing transaction costs all around.”
Moving on to indirect taxes, the proposed reforms can reduce transaction costs by as much as 50 per cent. The resultant gains to the economy can be Rs 4,000 to 5,000 crore a year. (This is actually an extrapolation based on an Exim Bank study.). Electronic data interchanges should expand to all ports and airports by January 2004. By April 2003, one airport and one major port must be fully EDI operational.
There are more than 50 notifications and more than 300 circulars and instructions on special economic zones, export oriented units and export processing zones. By April 2003, there will be a single notification and all circulars and instructions will be issued as a subject-wise compendium.
Unlike the recommendation made in the consultation paper, the chief export incentive scheme will be duty drawback, with efficiency of reimbursement improved. Duty drawback will also cover capital goods and state-level taxes. The duty entitlement passbook scheme will continue now and be merged with drawback from April 2005.
Customs duties will have three components — basic customs duty, countervailing duties and safeguard/ anti-dumping duties. The basic customs duty will be 0 per cent for life-saving drugs and equipment, defence and security-related goods and imports by the Reserve Bank of India. For other goods, 10 per cent for raw materials, inputs and intermediates and 20 per cent for consumer durables, to be attained by 2004-05.
Then by 2006-07, 5 per cent for basic raw materials, 8 per cent for intermediate goods, 10 per cent for finished goods that are not consumer durables and 20 per cent for consumer durables. How do you decide what is what' Look up Annexure A, which gives the details. Separate treatment for motor vehicles, cellular phones and petroleum products. Also separate treatment for agricultural produce and “demerit” goods. For these, duties can go up to 150 per cent and a separate expert committee will fix exact import duties for agro products.
For central excise, 0 per cent for life-saving drugs and equipment, security-related items, food and agro products, 6 per cent for processed food products, 14 per cent for items not specifically mentioned, 20 per cent for motor vehicles, air-conditioners and aerated water and separate rates for tobacco products and their substitutes.
There will also be special treatment for petroleum products, textiles and the small-scale industry sector. Value added tax will be introduced from April 2003. Does this only mean unification of state sales tax rates, as seems to be happening' Not according to the task force. “It is recommended that with the introduction of VAT, all other local taxes be discontinued, and the same should be taken into account in determining the revenue neutral rate.” Eventually, service taxation should be integrated into the central excise system.
As has been commented in the media, especially on personal income taxation, the final report grants more exemptions, so as to make the political economy of implementation easier to handle. On indirect taxations, reflecting lobbying by various organizations, there is greater deviation from the principle of unified rates proposed in the consultation paper. This is true of customs, as well as central excise.
Does this make the recommendations easier to implement, say in budget 2003-04' Probably not. Ask Rajnath Singh, Jagdish Shettigar or V.K. Malhotra, members of the committee set up by the Bharatiya Janata Party to evaluate Kelkar’s recommendations at the consultation paper stage. At that stage, the recommendations were a recipe for “electoral disaster”. They probably still are. Hence, any further discussion of the Kelkar reports is purely academic.