The Report of the Task Force on the Implementation of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 (‘the Second Committee Report’) was presented in July 2004 and is popularly known as the Kelkar Committee Report. It aimed at reducing fiscal deficits within the country.
The Task Force on Direct Taxes headed by Mr Vijay Kelkar submitted its first report in 2003 (‘the First Committee Report’) which recommended changes needed on direct taxation.
Since the budget is right around the corner, it would be apposite to assess the feedback, success of implementation of expert’s opinion and the industry reactions, so as to bend it with the budgetary proposals and recessionary pressures.
Considering that a span of five years has elapsed since both the reports have been laid down, giving sufficient time for the government to act upon the same, an endeavour has been made to critically analyse some of the significant proposals of both the reports and how far their efforts have materialised.
* Improvement in Tax Enforcement
Both Reports sought to encourage voluntary compliance of tax laws as its fundamental objective, which was anticipated to be achieved once the tax laws were simplified.
Mr Chidambaram, while presenting the previous Union Budget in his speech highlighted the need for bringing a new tax code, the future of which still remains uncertain.
Given the ongoing new initiatives being taken by the Government continuously in relation to the commercial usage of Permanent Account Number (‘PAN’) in order to cover most of the financial transactions, the tasks of enforcement improvement in governance seems to have, to an extent, been achieved. However, there is still a long way to go so that the PAN replaces the much need Citizen Identification Number.
* Tax Exemptions & Deductions
The First Committee Report recommended that the transitory arrangement of benefit of tax exemption under Sections 10A and 10B of the Income Tax Act (‘the Act’) either be withdrawn totally or be continued only for taxpayers engaged in manufacturing software.
It may be pertinent to note that the First Committee Report has not been regarded as critical for not implementing the provision for elimination of exemption of profits of export software. This is because the Indian economy has still not achieved its place in the global market as a exporting country.
Evaluating the inaction on the recommendations of the First Committee Report in this regard, the alternative chosen by the government to remain silent on this issue has proved to be a boon for the Indian economy.
It is suggested that to revive the slackening economy and provide an impetus to the economy, the Government must extend the provision for exemption under Sections 10A and 10B of the Act in the upcoming Budget.
The tax incentives under Sections 80 IA and 80IB of the Act were recommended to be deleted with immediate effect, without any sunset clause in the First Committee Report, the rationale of which was accepted in the Second Committee Report. However, it was not considered as the last word and the recommendations have been implemented only partially, as certain concessions and benefits available for infrastructure projects were provided with sunset clauses.
In light of the global meltdown and the recessionary growth, it is imperative for the upcoming Budget to extend the time limit for the concessions and benefits available to the infrastructure sector over a longer period and at a larger scale.
One of significant recommendations of the First Committee Report was removal of the rebates provided under Section 88 of the Act. The then Government in their budget for the financial year 2005–06 scrapped all sub-sections of Section 88 of the Act and clubbed such provisions under Section 80C of the Act. All the avenues that were eligible for the benefits under ex-post section were brought under the ambit of Section 80C as it exists today.
However, in place of rebates as under the earlier section, investments up to Rs 1 lakh were allowed as a deduction from the gross total income under Section 80C of the Act. Hence, the First Committee Report brought with it a new system of claiming tax benefits is now in place.
Taking cue from the above, and as suggested in the Second Committee Report, the present UPA Government must take measures to consolidate the system of deductions and exemptions, so as to simplify the tax laws and thereby evolve a new tax code by this endeavour. Such an effort would call for bold steps from the government in their first budget this term - i.e. Budget 2009-10.
* Personal Taxation Reforms
A review of the history of individual taxation suggests that the exemption limits have been kept low and the tax slabs were introduced to tax higher incomes at higher rates. The Second Committee Report while revisiting the individual taxation has hit the nail where it hurts the most.
The Second Committee Report rejected the imposition of a single individual income tax rate in favour of the multiple rate schedules.
However, to foster and nurture the ultimate motive of compliance, it is necessary to move towards a comprehensive tax regime by reviewing the tax laws in light of the vehement demands at the instance of the Indian public to have a single uniform rate of taxation for individuals and elimination of the unnecessary complexities which ‘make tax payment more taxing’. In this respect, it can be viewed that though the recommendations of both the Committee Reports lay down the law as it stands today, there is a need for revision so as to ensure the accomplishment of the ultimate objective of the Report.
Furthermore, the First Committee recommendations also included elimination of standard deduction which was well received then and implemented too. However, keeping the recessionary pressures and cut down in salaries and present employment scenario, it is recommended that standard deduction be re-introduced. This would ensure that the disposable income available with a common man does get enhanced.
In this regard, it may be pertinent to take note of the fact that the exemption of conveyance allowance was recommended to be continued subject to a ceiling limit of Rs 9,600. The above said limit has been retained till date, which in the present times cannot be regarded as adequate. It is recommended that the upcoming Budget addresses such and similar concerns which are considered imperative in light of today’s realistic economic requirements.
* Corporate Taxation
Considering the First Committee Report’s recommendations, tax on dividends and long term capital gains on transfer of listed equity was exempted, which was further accepted in the Second Committee Report. However, this led to another anomaly of introduction of Dividend Distribution Tax (‘DDT’) which is currently imposed at 16.995% (very high) and Securities Transaction Tax (‘STT’), which led to the complication of tax procedures.
The Economic Survey for the year 2008-09 tabled in the Parliament on July 3, 2009 also suggested bold reform measures including rationalizing DDT and reviewing or phasing out STT.
In view of the above, it is suggested to take the recommendations of the Committee Reports a step further and eliminate the imposition of DDT and STT as well in the upcoming Budget.
* Other Measures
The Second Committee sought to prefer simplicity vis-a-vis the inherent complexity. Therefore, it had sought to clarify the problems associated with the existing system of tax treatment of various forms of entities.
However, no gateway has been achieved in terms of implementation of the policy in respect of the taxation of funds and trusts, which still remains unclear.
Both the Committee Reports made the right recommendations but failed to appreciate fully the wide contours of the proposals, which have either been incorporated or not in the scheme of the Indian tax laws. These proposals would have to be worked on by the present Finance Minister and his team, in the upcoming Budget, so as to ensure an effective implementation of the Report, keeping the current scenario in perspective.
Considering that the Budget 2009-10 is to be presented in a few days time, it is necessary that the Government revisit the proposals of the Reports which require consideration and make recommendations for the benefit of “aam admi” plausible.
Aseem Chawla is partner, tax practice group and Puneeta Nangia is consultant, tax practice group at Amarchand & Mangaldas & Suresh A Shroff & Co
