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THE KELKAR COMMITTEE CONTROVERSY

The government on 9th September 2002 set up a task force on direct taxes headed by Mr. Vijay
Kelkar, advisor to Finance Minister Jaswant Singh, for rationalising and simplifying procedures
while strengthening enforcement to improve revenue mop up.
Vijay Kelkar is drawing applause and, in equal measure, criticism for the paradigm shift in fiscal
reforms proposed in the report released by the task force. This is not different from the reactions to
any radical reform pronouncement and Kelkar should take it with a pinch of salt.
Criticism has come from virtually all quarters including the ruling Bharatiya Janata Party citing that
if implemented, it could prove to be "politically costly" for the National Democratic Front
government.
But it is the single suggestion that government should lower tax rates and scrap all existing tax
rebates and savings incentives, that has outraged the middle class. The intense opposition to Kelkar's
suggestions is not even based on actual numbers - it is more an issue of sentiment and perception.
First, tax-paying Indians feel betrayed yet again at the threat of a promised tax break being
withdrawn within a couple of years after it was offered.
This means that those who availed of a 10 or 15-year housing loan assuming certain tax breaks, will
suddenly find themselves in a jam because the government changed its mind again.
Second, honest tax payers who have felt harassed and ripped off by the government for decades,
simply do not believe that tax rates will be reduced enough to offset the losses due to removal of
exemptions.
Or, even if the government reduces tax rates initially, that it will not hike them again within a year.
So fierce is the anger that government is scurrying to distance itself from the Kelkar
recommendations.
On the other hand Kelkar argues that the recommendations will leave a higher disposable income
at the hands of taxpayers, notwithstanding the elimination of standard deduction and exemptions on
small savings.
According to experts, the case can be illustrated by assessees whose taxable income is below Rs
200,000, and who account for a significant percentage of the tax net.
The industry, however, is in favour of eliminating tax exemptions, as recommended by the Kelkar
task forces on direct and indirect taxes in the draft consultative reports, according to the latest snap
poll of chief executive officers (CEOs) conducted by the Confederation of Indian Industry (CII).

Gross salary
Standard deduction
Income
from
other
sources
Deduction under Section
80L
Deduction under Section
80CCC
Tax on total income
Investments in savings
schemes
Investments in pension
schemes or Mediclaim
Tax payable
Surcharge @ 5%
Cash inflow
Cash outflow
Cash in hand

Taxable income Rs Taxable income


80000-120000
150000-200000
After
After
As of now
As of now
Kelkar
Kelkar
120000
120000
185000
185000
30000
0
30000
0
2000

2000

9500

9500

2000

9500

10000

10000

7000

2400

20500

16900

26500

50000

12000

15000

1700
85
120000
28285
93715

0
0
120000
22000
100000

13000
650
194500
63650
130850

13900
0
194500
38900
155600

Rs

Given a choice between the current tax regime and the one suggested by the Kelkar task force on
direct taxes, 81 per cent of the respondents chose the latter.
The poll also showed that the top CEOs in the country would rather have the exemptions done away
with in a phased manner than in one single step.
The 2,400 companies, which paid corporate tax of Rs 27,133 crore in the last two years and
distributed dividends of Rs 19,531 crore, will save almost Rs 6,937 crore annually, based on
conservative estimates, if the committees recommendations are accepted in toto.
However, the withdrawal of tax exemptions granted under Sections 10A and 10B and alternatives
recommended by the Vijay Kelkar Committee "will be a setback to the software industry", the
National Association of Software and Services Companies (Nasscom) said here today.
The panel's report is yet to be accepted by the government. If accepted, the proposals are likely to be
implemented in the Union Budget for 2003-04 (April-March) to be unveiled in late February.
Following are highlights of the panel's direct and indirect tax proposals:

DIRECT TAXES:

Three personal income tax tiers to be replaced by two tiers. Income between Rs 100,000400,000 will be subjected to 20 per cent tax. All income above 400,000 will be subjected to
tax at 30 per cent.
Dividends received from Indian companies will be fully exempt.
Long term capital gains on listed equity will be fully exempt.
Standard deduction for salaried taxpayers will be reduced to nil. However, exemption for
conveyance allowance subject to a ceiling of Rs 9,600 will continue.
Interest subsidy of two percent for housing loans up to 500,000 to all borrowers.
Reduction in corporate tax rate from existing levels of 36.75 per cent to 30 per cent for
domestic firms and 35 per cent for foreign companies over a period of three years.
Elimination of Minimum Alternate Tax under section 115JB of the Income Tax Act

INDIRECT TAXES:
Customs duty:

Multiplicity of levies must be reduced. There should be only three types of duties: a basic
customs duty, an additional duty of customs and anti-dumping/safeguard duties.
Zero per cent duty for life-saving drugs and equipment, defence and security related goods
and imports by the Reserve Bank of India.
Ten per cent duty for raw material, inputs and intermediate goods and 20 per cent for
consumer durables by 2004-05.
By 2006-07, five per cent duty for basic raw materials such as coal, ores and concentrates,
xylenes; eight per cent for intermediate goods; 10 per cent for finished goods other than
consumer durables; and 20.0 per cent for consumer durables.
Nominal reduction in duty on motor vehicles to 50 per cent from 60. Import duty on second
hand cars may continue at existing levels.
Exemption for cellphones from countervailing duty may be withdrawn but basic import duty
may be cut to zero in 2003-04.
Eight per cent duty on crude oil, 15 per cent on petroleum products by 2003-04 and five per
cent on crude oil and 10 per cent on petroleum products by 2004-05.
Higher duty of up to 150 per cent for specified agriculture products.
Duty cuts should be in stages of five per cent each year.

Excise duty:

Zero per cent duty for life-saving drugs and equipment, security items, food items and
agricultural products.
Six per cent duty for processed food products and matches.
Twenty per cent rate for motor vehicles, airconditioners and aerated water.
Separate rates for tobacco products and their substitutes.
Bulk tea may be exempt from excise duty.
Central excise duty on kerosene may be raised to one rupee a litre.
Warehousing facility for petroleum products should be withdrawn.

Annexure -1
Following are the proposals for individuals:
Agricultural income: Agricultural income should be taxed at normal rates. Taxpayers with an
agricultural income should fill in a different form.
Capital gains: Long-term capital gains will be taxed at normal rates. However, tax on long-term
capital gains on equity will be exempt.
Dividend paid to shareholders will be exempt. No tax on distribution of dividends.
Interest on housing loans: Deduction for mortgage interest on loans to buy a owner-occupied
dwelling should be reduced to Rs 100,000 in AY 2004-05, to Rs 50,000 in AY 2005-06 and to nil in
AY 2006- 07.
Deletion of tax concessions: Tax concessions are now available in terms of: a) 'Exemptions' under
Sec. 10, b) 'Income Deductions' under Chapter VI-A and c) 'Tax Rebates' under Chapter VIII.
The committee appears keen to eliminate all deductions. Some essential deductions will be
converted into rebates but the rebate will be at the minimum marginal rate of personal income tax 20 per cent.
The following concessions will be withdrawn :
Sec. 16(i): Standard deduction available to employees.
Sec. 88: Tax rebates on investments in specified assets such as NSC, NSS, EPF and PPF, tax saving
units of mutual funds, premium paid on life insurance, repayment of housing loans, and
infrastructure bonds of IDBI and ICICI.
Sec. 80L: Interest income and dividends from specified sources.
Sec. 88B: The Rs 15,000 tax rebate to senior citizens. Currently, a senior citizen should have
completed 65 years on the last date of the FY. Henceforth, senior citizens will be taxpayers who are
more than 65 years in age on the first day of the financial year.
Sec. 88C: Tax rebate of Rs 5,000 to non-senior female citizens.
The following income deductions will be converted into tax rebates.
Educational expenses: Sec. 80E provides for deduction up to Rs 40,000 on repayment of a loan
taken for higher education to be converted to a tax rebate at the rate of 20 per cent with the
maximum restricted to Rs 4,000.

Medical expenses: Sec. 80D provides for a Rs 15,000 deduction on medical insurance premium and
Sec. 80DDB provides Rs 40,000 for medical treatment. The tax benefit under Sec. 80D and 80DDB
is to be retained only as a rebate @ 20 per cent subject to a maximum of Rs 3000 and 4,000
respectively.
Wealth tax will be abolished.
Annexure -2
Kelkar Committees proposals regarding direct taxes for corporates
The Kelkar Committee has suggested two ways of implementing a package of reforms:
Option-I: An immediate, one-time institution of rate cuts and elimination of exemptions.
Option-II: A coordinated phase-out of tax exemptions and deductions over a period of, say, three
years.
The committee favours the first option, which would prevent lobbying by special interest groups.
The following are the salient recommendations:
Reduction in corporate tax rate from the existing levels of 36.75 per cent to 30 per cent for
domestic companies and to 35 per cent for foreign companies.
Exemption of long-term capital gains on equity.
Elimination of minimum alternate tax under section 115JB. Unabsorbed depreciation will be
merged with business loss and will lose its separate identity.
Business loss would be allowed to be carried forward indefinitely. Removal of the following
exemptions u/s 10 and deductions under Chapter VIA with immediate effect and not by a sunset
clause :
a) Sec. 10A and 10B related with newly established undertakings in free trade zone and 100 per cent
export- oriented undertakings.
b) Sec. 80-IA in respect of profit and gains from industrial undertakings or enterprises engaged in
infrastructure development or telecommunication service or development of industrial park or
special economic zones or generation, transmission or distribution of power.
c) Sec. 80-IB in respect of profits and gains from certain industrial undertakings other than
infrastructure development undertakings (this includes backward areas also).
d) Sec. 80JJAA in respect of employment of new workmen.

e) Sec. 80M in respect of inter corporate dividends.


f) The phase out programme in respect of sections 80HHB, 80HHBA, 80HHC, 80HHD, 80HHE,
80HHF, 80-O, 80R, 80RR and 80RRA will continue.
Depreciation allowance u/s 32 will be restricted to the allowance charged to the profit and loss
account under the provisions of the Companies Act.
Sources :
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http://finmin.nic.in/kelkar/
http://incometaxinfo.com/kelkar/kelkar.html
www.rediff.com/money
The Business Standard
The Economic Times
The Business Line
Chetain Jain