Mumbai: Dr Vijay Kelkar, adviser to Indian Finance Minister Jaswant Singh, in his report on tax reforms, produced a mixed bag of proposals that received both bouquets and brickbats from various quarters.

In the report, he diluted some of his earlier controversial proposals, but retained others. While he retained the proposals to eliminate income-tax exemptions and bring agricultural income into the tax net, he diluted the earlier proposal to do away with tax exemption on housing loans.

On the plus side, he recommended that there should be only two basic rates for income tax. The first slab will be at 20 per cent for income from Rs 1-4 lakh and the second at 30 per cent for income above Rs 4 lakh.

In addition, the report recommended a hike in the income-tax exemption limit to Rs 1,50,000 per annum for senior citizens and widows. For others, the exemption limit has, in the report, been raised to Rs 100,000 from the current Rs 50,000.

Also on the plus side, the report recommended doing away with tax on dividend distribution and long-term capital gains on listed stocks. Dividends also need not be taxed at the hands of the shareholders or unit-holders, the committee has said.

On the minus side, the committee recommended knocking off almost all the tax rebate schemes under Section 88 and tax deductions on interest income under 80 L.

If the recommendations are accepted, the taxpayer will no longer get exemptions on interest income received from bonds, securities and debentures under section 10. The only concession the committee has provided is for continuation of deductions for contributions to pension funds, whether run by Life Insurance Corporation (LIC) or other private players. The ceiling of the deductions is proposed to be raised from Rs 10,000 to Rs 20,000.

Dr Kelkar had earlier proposed doing away with incentives for housing loans entirely. However, he diluted this proposal by reducing the amount eligible for deduction to Rs 50,000 from Rs 150,000. To mitigate the effect, an interest subsidy of 2 per cent will be provided by National Housing Bank on home loans below Rs 5 lakh.

Proposals for corporates
For companies, there are a few goodies, like eliminating the minimum alternate tax (MAT) and slashing the corporate tax rate to 30 per cent, both of which were welcomed by industry associations. The report also recommended that the depreciation rate should be reduced to 15 per cent from 25 per cent.

In a move that can impact the stock markets, the report proposed that mutual funds pay a 20 per cent tax on short-term capital gains. At present, mutual funds are not subject to any tax. This proposal is evidently aimed at encouraging mutual funds to stay invested.

The infotech sector, however, stood to lose as the report recommended that tax incentives to software exports under section 10A/10B of the Income-Tax Act be withdrawn after the government thrashes out totalisation agreements with India’s trading partners, such as the US. The tax benefits should be continued till the agreements are signed. Such companies should, however, be subject to a 30-per cent dividend distribution tax, said the report.

The National Association of Software and Service Companies (Nasscom) reiterated its demand for retaining the full tax exemption under the section 10A/10B. Nasscom president Kiran Karnik says: “The government had declared a ‘no-tax’ regime for software exports up to 2009, and the industry requests it to abide by the same.”

Excise proposals
The report recommended three rates of excise: 6 per cent for processed food products and matches; a 14 per cent standard rate (Cenvat) and 20 per cent for cars, air-conditioners and soft drinks.

While Kelkar said the excise duty on petroleum products should be set at specific rates instead of ad valorem, he refused to specify the exact duty to be levied. The report has called for a raise in excise duty on kerosene by Re 1 a litre and an additional duty of Re 1 on diesel.

Kelkar has also called for a drastic cut in the customs duty rate on finished goods to 10 per cent by 2006-07. Further, by 2006-07, he has sought to distinguish raw materials like coal, ores and concentrates from intermediates like capital goods, basic chemicals and metals by suggesting two rates of 5 per cent and 8 per cent, respectively, for them.

Government reactions
However, how many of these proposals the government will accept still has to be seen, especially given the impending state elections. The Bharatiya Janata Party (BJP) has already ruled out accepting proposals like income tax on agriculture, and elimination of standard deduction and incentives for savings.

BJP general secretary Rajnath Singh, who chaired a party panel appointed to study the report, has expressed unhappiness that the panel did not incorporate the party’s suggestions as much as expected.

The Rajnath Singh committee has met today to finalise its report, which it will present to Jaswant Singh. Singh will meet Prime Minister A B Vajpayee and Deputy Prime Minister L K Advani after 15 January 2003 and brief them on the recommendations he wants to include in next year’s budget.