The Telegraph
Since 1st March, 1999
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Salaried hit, Kelkar stirs political pot

New Delhi, Dec. 27: The pen-pushing, middle-class sala-ried taxpayer is once again the fall guy who must bear the brunt of the government’s tax axe.

The high-profile Vijay Kelkar committee today handed in its final report on taxation, suggesting that the Centre re-tailor tax slabs so that incomes up to Rs 1 lakh attract zero tax and those between Rs 1-4 lakh 20 per cent. For people earning over Rs 4 lakh, there will be two tax slabs: 20 per cent till Rs 4 lakh (which comes to Rs 60,000) and 30 per cent above it.

The committee believes that by reducing slabs and marginally cutting down on top level of tax, compliance will improve and more money will flow into government coffers.

But what the committee proposes to give with one hand, it seeks to take away with the other. It has recommended scrapping of all tax incentives, including standard deduction for the salaried, a proposal that the BJP has been bitterly opposed to.

Kelkar’s report, submitted to finance minister Jaswant Singh, will form the basis on which the government will work out its budget next year. The proposals — an interim version was released last month — have been watered down following strident criticism from politicians across the spectrum, but are still harsh.

Tax analysts say the contentious recommendation on standard deduction is fraught with injustice. Standard deduction — a fixed amount that the salaried claim as tax free income — is allowed as the salaried have little scope to duck taxes by clever planning. The report concedes that self-employed people have greater opportunity to do so by lumping personal expenses with business-related ones.

Kelkar, however, claims that despite this “everyone gains with the new tax regime — everyone pays less tax”. But even here, the salaried class gains less from tax breaks as compared to the self-employed.

As expected, the report has recommended that tax incentives for small saving schemes — Public Provident Fund, National Savings Scheme and Post Office Savings Scheme — and fixed deposits in banks are done away with.

The only sops the report is willing to give are for pension plans and medical insurance run or likely to be floated by insurance majors. The maximum tax rebate in both cases will be Rs 4,000 within an overall limit of Rs 20,000.

This could ruin the attraction of small savings schemes, upsetting states like Bengal that draws much of its borrowings from them. The beneficiaries would be global insurance majors who have made a foray into the country and state-run insurance companies who are slugging it out with them.

Kelkar has, however, moderated his proposals for senior citizens and widows. Those over 65 and widows — regardless of age — earning up to Rs 1.5 lakh will not have to pay tax. Kelkar today conceded he was “remiss” and “did not do my homework properly there”.

Though he gave in to suggestions by an internal review committee on taxation headed by the BJP’s Rajnath Mishra on senior citizens, Kelkar was unbending on housing sops. He stuck to his stand that tax deduction allowed on mortgage paybacks of up to Rs 1.5 lakh annually will have to come down to Rs 50,000. Alternatively, the government will have to dole out a 2 per cent interest subsidy on all housing loans of up to Rs 5 lakh.

“We felt that why should only taxpayers get a benefit when they construct a house; others who don’t should also get some help,” Kelkar said.

This leaves the Centre only one option — slash tax sops on housing by two thirds. This is not likely to go down well with the BJP’s urban vote bank.

The Kelkar panel attempted to retain its earlier proposal to tax farm incomes, but the report makes it clear that this can happen only if states agree.

The only people likely to draw cheer from the proposals are stockbrokers. With a joint parliamentary committee giving market scams a burial, Kelkar has proposed that dividends from Indian companies be fully tax exempt. There is a similar suggestion for long-term capital gains on listed equity. This could prod the reluctant retail investor back into the bullring.

n See Business Telegraph

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