The Telegraph
Since 1st March, 1999
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Kelkar salutes seniors in tax rejig

New Delhi, July 23: The government today came out with a new report on fiscal management which seeks to revamp income tax slabs and rationalise savings incentives, while retaining tax sops for housing and senior citizens.

It also sought to bring in a nationwide value-added tax (VAT) on goods and services, in place of all central excise, services tax and state octroi, levies and sales tax under a “grand bargain”, which confers on both the Centre and states the right to tax almost all goods and services concurrently at fixed rates. This will see combined taxes on most goods coming down to 20 per cent.

The report, which was submitted today to finance minister P. Chidambaram, wants to totally exempt taxes on income up to Rs 1 lakh, levy a 20 per cent tax on that above Rs 1 lakh and up to Rs 4 lakh and 30 per cent on income beyond Rs 4 lakh.

The report authored by Vijay Kelkar, the finance minister’s adviser, is significantly different from an earlier report which he had submitted during the BJP regime, in only one major aspect — retention of tax sops for the housing sector and senior citizens.

Kelkar’s earlier bid at fiscal fundamentalism by suggesting the scrapping of these incentives had drawn attacks from both the right-wingers within the BJP as well as from Left politicians.

With a change in the government, and the Left parties being in a position to dictate terms, the former finance secretary has carefully chosen to tread the path of populism.

His report, which had inputs from finance secretary D. C. Gupta, revenue secretary Vineeta Rai and expenditure secretary D. Swarup, however, wants to rationalise all incentives to savings by moving to the single EET (exempt during collection, exempt during accumulation and tax during withdrawal) system. This means that all savings up to Rs 1 lakh in approved securities like provident fund (PF) and pension plans will be tax-free, but whenever these are encashed, taxes will have to be paid at current rates.

At present, savings in long-term funds like the PF are ‘grandfathered’, which means that these savings and their interest accruals are tax-free even when encashed. In future, such savings will be subject to tax levy at the time of encashment.

While moving to this system, standard deduction will be done away with and various exemptions under Section 10A, 10B, 801A and 801B of the Income Tax Act will be scrapped.

The new Kelkar report says while these tax reforms would mean a drop in immediate revenue collections, they are expected to lead to better tax compliance which would “overcome this loss of revenue”.

Similarly, on corporate taxes, the committee says the top of the ladder tax rate will be brought down from a current 35.875 per cent to 30 per cent.

The Kelkar committee also suggests a single goods and services tax — a countrywide VAT — on almost all goods and services. This will replace Cenvat, central service tax, state sales tax and octroi.

It proposes what it calls a grand bargain, whereby states will have the power to tax all services concurrently with the Centre. Consequently, both the Centre and state governments would exercise concurrent but independent jurisdiction over common or almost common tax bases extending over all goods and services.

Under the grand bargain, both the Centre and states will have to abide by the following conditions — agree to a three-tier ad valorem rate, in addition to a zero rate. The standard rate for the Centre has been set at 12 per cent and it will be 8 per cent for states.

There are two other alternatives — a floor rate and a higher rate. Under the floor rates, the Centre will be allowed to charge 6 per cent and the states 4 per cent. Under the higher rate plan, the Centre will charge 20 per cent and the states 14 per cent.

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