Kelkar lays out big tax push

Tax efforts will have to be frontloaded.

The Vijay Kelkar task force on the Fiscal Responsibility and Budget Management (FRBM) Act is likely to suggest a frontloading of tax efforts by the new government, a progressive move towards a comprehensive central value added tax on both goods and services at 16 per cent, and major tax administration efforts to effect a 15 per cent rise in revenue over the next four years.

According to finance ministry sources, the task force expects the Centre's revenue deficit to be 0.5 per cent of the gross domestic product (GDP) by 2007-08, from 3.6 per cent now. This, they said, would render the fiscal deficit at a much more manageable level of about 1.5 per cent of the GDP from 4.6 per cent now.

The report, to be presented to the finance minister by mid-June is significant, since its recommendations are expected to form key inputs for P Chidambaram's first Budget under the United Progressive Alliance government.

The Congress party has often endorsed the Kelkar task force reports on direct and indirect taxes and considers it as a roadmap for reforms in taxation.

Frontloading of tax efforts would essentially require the government to take bold decisions on exemptions and tax administration in the first two years, the sources said.

The committee has projected a compounded annual growth rate of over 16 per cent for direct taxes and almost 28 per cent for excise and service tax collections put together over the next four years.

The highlight of the report, the sources said, would be the extremely bullish assumptions on the growth of service taxes. The task force expects the service tax collections to top Rs 80,000 crore, representing almost a 10-fold growth during the next four years.

The sources said there was little scope for any rise in customs duty receipts. Instead, they expected pressure on the government to reduce the peak rates of customs duty, resulting in a suppression of customs collections.

While the FRBM Act has targeted the elimination of the revenue deficit by March 31, 2008, the common minimum programme of the United Progressive Alliance has extended the deadline to 2009.

For the four-year period, Kelkar has assumed the economy to clock a modest 7 per cent growth rate, with inflation remaining benign at about 4 per cent.

The sources said the task force anticipated personal income taxes as a percentage of GDP to rise to 2.31 by 2007-08 from 1.60 now.

Similarly, corporate tax collections as a percentage of GDP are expected to increase to 2.84 from 1.9 now. The direct tax-to-GDP ratio is, thus, expected to touch 5.10 per cent by 2007-08, compared with 3.5 per cent now.

In the current fiscal, Chidambaram will have a relatively easy task on the direct taxes front as the Central Board of Direct Taxes has projected a higher 25 per cent growth rate in corporate taxes over the previous fiscal. This will offset the much lower anticipated growth of less than 15 per cent in personal income tax during the year.

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The fiscal roadmap

• Service tax collections to top Rs 80,000 cr, representing almost a 10-fold growth during the next four years.
• Personal income taxes as a percentage of GDP to rise to 2.31 by 2007-08 from 1.60.
• A comprehensive central value added tax on both goods and services at 16%.
• Corporate tax collections as a percentage of GDP are expected to increase to 2.84 from 1.9 now.