At the centre of a heated argument were the two most talked-about recommendations of the direct taxes report abolition of dividend taxation and long-term capital gains tax.
Dr Vijay Kelkar was forced to put up a strong defence against the onslaught of two of Indias most renowned public finance experts, Dr Raja Chelliah and Dr Amaresh Bagchi, both former directors of NIPFP and former Finance Commission members.
The knock out punch came from Dr Chelliah who reminded Dr Kelkar, You are required to guide the government in right manner. Not one to take it lying down, Dr Kelkar responded by saying, I am feeling like Eklavya.
Both Dr Chelliah and Dr Bagchi expressed strong reservations on the Kelkar panels suggestion of doing away with dividend tax and long-term capital gains tax. Dr Bagchi said that there is no justification for exempting dividend and capital gains. Supporting the view, Dr Chelliah said, It is very necessary to tax dividend but give some relief.
He suggested that a better option was to reduce the corporate tax rate in a gradual manner, and not at one go. If you remove dividend tax, it will be very difficult to get it back, warned Dr Chelliah. One of the participants said that the focus of taxation must shift from white money to black money, which Kelkar panel has not done.
Dr Bagchi, who appeared to be in complete disagreement with the views and recommendations of the Kelkar panel on direct taxes, said that in no country, dividend taxation has been removed altogether. He also stressed that the taxation structure proposed by the Kelkar panel was regressive.
Dr Kelkars response to the argument was that there is no harm in being the first one to do that, if it is required. On the issue of regressivity, he told Dr Bagchi, You may be right at other places, but here you are totally wrong.
Taking a dig at the Kelkar panels suggestion of removing almost all the exemptions on the direct tax side, Dr Chelliah pointed out, If you have an incentive proportion, see the effectiveness before removing them. He also added that income for taxation purposes should reflect ability to pay.
Commenting on the tax collection targets, Dr Chelliah said that, Target fixing is meaningless. It is as meaningless as the 8 per cent growth target. You dont have control on revenue growth. It will depend on growth of income.
On the indirect tax side, the recommendation of the panel on having four-rate customs duty structure by 2006-07 instead of fewer rates, received flak from participants. Dr Kelkar said that as long as the rates are on the lower side, the distortion will be minimal.
He also reiterated the guiding principles of the two reports submitted by the task force headed by him. However, he failed to convince the Bhishmapithamahas and Dronacharyas.