Expediency Chains Reforms

Updated: Dec 29 2002, 05:30am hrs
Developments in the area of taxation in 2002 have been a mere reiteration of the fact that politics, and not prudence, guide reforms in the country.

The year will be remembered for sharp reactions from various quarters to certain budget proposals and recommendations of the two task forces on direct and indirect taxes headed by Dr Vijay Kelkar, advisor to the finance minister.

Criticism of the Budget 2002-03 proposals, despite a few modifications, led to the swap of portfolios between Yashwant Sinha, now external affairs minister, and Jaswant Singh, now finance minister.

Mr Sinha, keeping in mind the huge shortfalls of over Rs 10,000 crore in 2000-01 and 2001-02 from even the revised estimates, decided to touch exemptions and tap new areas both in direct and indirect taxes for improving the tax collection situation in the budget for 2002-03.

However, the proposals, including rationalisation of the tax rebate under Section 88 of the Income Tax Act, taxation of dividends in the hands of recipients and service tax on life insurance premia, attracted severe criticism, which forced him to modify these proposals through amendments in the Finance Bill, and ultimately exit from the finance ministry.

Mr Singh, soon after taking over as finance minister in July, tried to assuage the feelings of the middle class and announced complete removal of service tax on life insurance premia, a hike in the TDS limit for dividends from Rs 1,000 to Rs 2,500 and an increase in the investment limit under Section 80L from Rs 12,000 to Rs 15,000.

Mr Singh also promised to put more money in the peoples purses and constituted two task forces under the chairmanship of Dr Kelkar to suggest taxation system reforms. To the surprise of many, the task forces on direct and indirect taxes decided to pick up the issue of taxation reforms from where it was left off in the budget.

The consultation papers released by the two panels focussed on ending the exemption raj. They have also suggested overall lowering of the tax incidence to make the whole process revenue neutral.

In the case of direct taxes, the concerned panel has favoured a big bang approach in removing exemptions and suggested a three year time-frame, taking into consideration the political aspects associated with such a move.

However, as expected, despite Dr Kelkars explanations that the package would result in more money in the hands of taxpayers and in lowering the cost of risk and debt capital for industry, the recommendations have failed to find favour with the people and, in turn, the political masters.

Indications emanating from the government clearly suggest that Mr Singh will find it very difficult to accommodate the recommendations of the two task forces, especially those related with exemptions, in the forthcoming budget. In fact, he has already said that the government cannot renege on its tax commitments. Finance ministry officials feel that the reports of Dr Kelkars task forces are set to receive the same treatment as numerous such reports on taxation reforms have received in the past. Political expediency will be the deciding factor in picking up proposals for implementation.