The two Kelkar committee reports on direct and indirect taxes have been submitted on schedule. A third report will examine changes in legislative provisions. Transparency is also provided by placing these reports on the finance ministry’s website, so that they can be debated before expected introduction in the budget for 2003-04. Understandably, more attention has been focused on the direct tax component. The committee favours one-shot introduction of the entire package in the budget for 2003-04, with a three-year phased introduction as a second-best alternative. However, the phrase entire package is the key, since tax rate reductions and other changes need to be considered in conjunction with the removal of exemptions, the revenue neutrality of the package hinging critically on exemption removal. Procedural simplification, such as through the proposed national tax information network, is hardly controversial and will permit computerized filing of returns and processing of refunds.
Since there is no reason why rich farmers should not pay taxes, there is also the more controversial proposal that farm income should be taxed above the threshold of 1 lakh. However, this state subject requires a resolution by the states under Article 252 of the Constitution, so that agricultural income tax is levied by the Centre and is distributed (net of collection taxes) to the states. On both individual and corporate income tax, the idea is to slash rates and remove exemptions. Individual income taxes will have two slabs of 20 per cent (1 lakh to 4 lakh) and 30 per cent (above 4 lakh), with no taxes on dividend income and long-term capital gains. Wealth tax will also be scrapped. However, on the flipside, there will be no standard deduction, no tax incentives for savings and no exemptions, barring for handicapped people and medical expenses for senior citizens.
This cleaning up and removal of exemptions will certainly be resisted. Much will also be made of the fact that out of 28.2 million assesses, 75 per cent will be out of the tax net because of increase in the threshold. This is a non-issue, the moot point being whether removal of exemptions and procedural simplification will reduce tax evasion and increase the direct tax to gross domestic product ratio. Similarly, the corporate tax rate will be slashed to 30 per cent (35 per cent for foreign companies), with removal of exemptions and scrapping of minimum alternate tax. There will also be changes in methods of computing depreciation. The media have already reported corporate sector savings, thanks to the removal of dividend tax and slashing of rates. The former is desirable. But the latter is unclear, as the effect of removing exemptions has not been factored in. On indirect taxes, the principle of simplifying procedures and removing exemptions continues, although the Kelkar committee has been less forthright about exemption removal. The committee has been more direct on direct tax reform. Whether the government will have the stomach to remove exemptions is the question.