Kelkar takes sword to taxes, exemptions

Calls for reducing corporate tax rate to 30% from 35.875%, cut depreciation rate to 15%.

The task force on implementation of the Fiscal Responsibility and Budget Management Act, chaired by Vijay Kelkar, adviser to Finance Minister P Chidambaram, has recommended cuts in taxes across the board and a removal of all exemptions barring those for senior citizens and women and that on housing loans.

For income tax, Kelkar has proposed a two-rate structure: 20 per cent on individuals with an annual income between Rs 1 lakh and Rs 4 lakh and 30 per cent for those earning over Rs 4 lakh.

Annual income up to Rs 1 lakh should not be taxed. Against this, he has called for elimination of the standard deduction and for taxing withdrawals from small savings schemes, including the Public Provident Fund.

The report of the task force, submitted by Kelkar to Chidambaram on Tuesday, wants the corporate tax rate cut to 30 per cent from 35.87 per cent now and a depreciation rate of 15 per cent.

Existing tax incentives for industrial units should be continued or "grandfathered" but they should not be extended to new units, the report says while recommending all exemptions and concessions under Sections 10A, 10B, 80IA, 80IB and 80L.

The report proposes a "grand bargain" of the Centre with the states on taxing goods and services. States should be allowed to tax all services concurrently with the Centre, while the latter should cut the Cenvat rate from 16 per cent to 12 per cent. States should adopt a revenue-neutral rate of 8 per cent, it suggests.

It has prescribed two more ad valorem rates, 6 per cent and 20 per cent, for the Centre. The corresponding rates for states are 4 per cent and 14 per cent. The total tax burden on most goods imposed by both by the Centre and states will thus not exceed 20 per cent.

In Customs, the task force has proposed a shift to a three-rate structure: 5 per cent, 8 per cent and 10 per cent. The Kelkar committee report on indirect taxes released in December 2002 had recommended a two-rate Customs duty structure by 2004-05: 10 per cent for raw materials, inputs and intermediate goods; and 20 per cent for final goods.

Within two years, the rates should be 5 per cent for basic raw materials, 8 per cent for intermediate goods, 10 per cent for finished goods and 20 per cent for consumer durables, it had said.

According to the task force, the tax reforms should be "front-loaded" and undertaken in 2005-06. The measures will yield the Centre an extra 3 percentage points of the gross domestic product in taxes.

"Early fiscal consolidation will yield early fruits in terms of higher growth in investment and employment," it says, adding that early decisions in tax and expenditure policies will see their full beneficial impact by 2008-09.

The task force says expenditure reforms must move towards providing more public goods like health and education instead of subsidies. It has also stressed the role of promoting public-private partnerships in the provision of such goods.

 Click here for full report