The Kelkar Committee report on tax reforms has opened
a Pandoras box with all sections crying foul and
forcing the Indian government to review the report. What
is it all about?
report has been prepared by a committee headed by Dr Vijay
Kelkar, advisor to the Indian finance minister, to suggest
tax reforms that will enable the economy to achieve global
competitiveness under the World Trade Organisation regime.
draft of the report, which has appeared in the print media,
suggests wide-ranging changes in direct and indirect taxes.
The most notable suggestion has been the withdrawal of
section 88 tax exemptions. Under section 88, rebates are
given for investments in infrastructure and housing. Today,
the housing sector is booming basically due to tax exemptions
and reduced interest rates; taking away this sop will
hit the salaried class the hardest.
the case of infrastructure, one should cite the case of
Konkan Railways, a huge project that was successfully
funded due to the rebate in infrastructure bond issued
by the Railways. Infrastructure needs huge investments
and one of the successful avenues of funding comes from
bonds. Infrastructure will also be hit by the withdrawal
the Reserve Bank of India cut its rates, which led to
all banks reducing their rates on deposits. Today, the
maximum interest State Bank of India offers on its deposits
is 6.5 peer cent. With the withdrawal of the tax rebates
infrastructure bonds, the fixed income class, as also
senior citizens, will be severely affected.
a prudent move
committee has also recommended withdrawal of section 10A
and section 10B of the Income Tax Act.
10 of the Income Tax Act provides for exemption of income
tax to exports of goods and computer software by units
located in free-trade zones, technology parks and special
economic zones. Section 10B allows a deduction of profits
and gains derived by a 100-per cent export-oriented units
from export of goods and computer software.
exporters are crying foul. Exports, particularly software
exports, have increased tremendously due to tax exemptions
and a sudden withdrawal will create problems for exporters.
The Council for Leather Exports (CLE), reacting to media
reports, says the Kelkar report on direct and indirect
taxes lacks thrust on export efforts.
committee has called for scrapping several export promotion
schemes like the Duty Free Replenishment Certificate (DFRC),
the Export Promotion Capital Goods (EPCG) scheme, advance
license and the Duty Entitlement Passbook Scheme (DEPB).
Instead, it has called for only two schemes, one for special
economic zones and the other for export-oriented units.
these schemes will hit the exporters hard as they meet
different genuine requirements of exporters, says
CLE chairman Irshad Mirza. The proposal will erode price
competitiveness in global markets.
adds that the Kelkar Committees recommendation to
reduce the excise duty exemption limit for the small scale
sector from Rs 1 crore to Rs 50 lakh in two phases is
a discouraging move which will prevent small units in
enhancing their production.
The Confederation of Indian Industry (CII) is of the opinion
that the recommendations of the Kelkar Committee are right
in their fundamentals and are in tune with CIIs
demand for a simple structure, fewer slabs of duty and
focus on processes. However, it feels that the exemptions
should not be withdrawn abruptly.
has also endorsed the recommendation of a two-slab custom
duty structure, stating that products close to the raw
material side should attract 10-per cent duty and products
close to the finished goods side should attract 20-per
cent duty. CII is of the opinion that the recommendation
to bring the corporate tax to 30 per cent is generally
in line with other economies in the world.
policy to bring agricultural income into the tax net eventually
has also been welcomed. But when and at what level will
agricultural income come into the tax net will remain
vague, as here the government will be walking on a political
report will be reviewed by the government in mid-December
2002. However, given the opposition, it will be challenging
for the government to resist populist demands.
Minister Jaswant Singh has already stated that that the
government will not renege on its commitments to the people.
This leads to the conclusion that the watered-down implementation
of the report could on the cards.