Try To Sit, Hell Tax Your Seat...

Updated: Nov 17 2002, 05:30am hrs
The taskforce on direct taxes, headed by Dr Vijay Kelkar, has submitted its report. It is a working paper, says the finance minister. It is only a consultation paper, says the deputy prime minister. Soon, someone in the government (most likely the defence minister) will say it is a non-paper. Dr Kelkar could not have imagined that his paper had the potential to split the NDA government.

I have been able to read only the executive summary. I do not know whether written instructions or a brief was given to the taskforce. The objectives of the exercise are, therefore, not clear. Further, it is not clear what the taskforce intended to achieve or what its priorities were. There are so many contradictions and so many questionable assumptions in the recommendations that, I am afraid, the whole exercise may turn out to be a waste of time. At the beginning, the taskforce notes that other economies have increased their tax revenue-to-GDP ratio not by increasing tax rates but by simplifying tax structures, widening the tax base and improving the administration. These, I suppose, are the best international tax practices. So far, so good. But many recommendations of the taskforce contradict these very objectives, as I shall explain presently.

Take the tax revenue-to-GDP ratio. There is no ideal ratio. Besides, the ratio will fall or rise depending upon the rapid or slow pace of growth of the economy vis-a-vis a rigid tax regime. Through the nineties, India consciously brought down its tax rates from expropriatory levels to more reasonable levels. Hence there is no surprise that the tax revenue-to-GDP ratio declined during that period. If the goal is to have a higher ratio, there is no merit in increasing the tax rates, because that would cancel all the good work done in the nineties. The way forward is to widen the tax base and improve the efficiency of tax administration.

The United Front government can pat itself on the back for introducing tax rates of 10 per cent, 20 per cent and 30 per cent. Thankfully, the taskforce does not recommend increase in the income tax rates. On the contrary, it suggests that the general exemption limits should be increased to Rs 1,00,000 for individuals/HUF and that there should be only two slabs of 20 per cent and 30 per cent. It recommends the extension of the principle of reasonable rates to the corporate sector and suggests a rate of 30 per cent for domestic companies and 35 per cent for foreign companies. The taskforce also rejects Mr Yashwant Sinhas retrograde decision to re-introduce the dividend tax, which was abolished in 1997. What is surprising, however, is the suggestion to do away with the dividend distribution tax (payable by companies), the minimum alternative tax and long-term capital gains on equity.

The contradictions are obvious. Taken as a whole, the effect of these recommendations will be that nearly 75 per cent of individual tax payers will go out of the tax net; there will be a proliferation of zero tax companies; and genuine taxable incomes, such as capital gains and dividends, will be totally free of tax. In the nineties we succeeded in building the tax base from a mere 12 million to 25 million. We also tried to capture genuine taxable incomes through efficient taxes such as MAT and tax on distributed dividends. All this good work is sought to be cancelled in the pursuit of undefined and incomprehensible objectives.

If this is the bad part, what follows is worse. In the name of eliminating exemptions, the taskforce has unleashed a set of recommendations, which will make a mockery of other well-defined objectives. The taskforce seems to share the paranoia about exemptions. Not all exemptions are bad. Some exemptions are necessary in the interest of equity, some in the interest of efficiency and some in the interest of growth. The taskforce seems to think that all these objectives can be sacrificed at the altar of more revenues.

According to the taskforce, all exemptions or rebates for savings should be eliminated. But, will that not impact the savings rate and, consequently, investment and the ambitious growth target of 8 per cent

All exemptions for senior citizens and the handicapped should be eliminated. Did not the taskforce know or care that there is no social security system in place for the old and the handicapped

Deduction of interest in respect of housing loans should be eliminated. Is there no merit in the arguments of economists that there is a beneficial multiplier effect due to housing starts on crucial industries like steel, cement, brick-making, tile, wood, sanitary ware and construction.

There are other recommendations relating to corporate income tax that are equally retrograde. According to the taskforce, a clutch of sections granting exemption for specific purposes or activities should be eliminated with immediate effect and not even a sunset clause should be put in place. Evidently, in the view of the taskforce, these are pernicious exemptions. Among the provisions mentioned are section 10A, 10B, 35 and 80IA of the Income Tax Act. What do these provide for These sections provide for exemption to exports of computer software for a period of 10 years, to expenditure on scientific research, and to profits derived from any business of developing and operating infrastructural facilities such as roads, bridges, water supply, telecommunications, industrial parks, etc. Successive finance ministers justified these provisions in their Budget speeches and introduced necessary amendments and refinements from time to time. The goal was to maximise investment, promote vital infrastructure projects and spur exports. In one sweep, the taskforce has rubbished all that was said and done in 12 years.

In the never-ending battle between a predatory state and hardworking individuals, and enterprising companies, it is unfortunate that the taskforce has taken the side of the state. In my view, no government should take money from the people, through taxes, more than what it needs for genuine capital and revenue expenditure. It is unfortunate that Mr Kelkars taskforce has ignored the character of the Indian state (predatory, rapacious, corrupt and profligate) and pleaded for more taxes. Instead, it should have pleaded for more equity and more efficiency.

(The author is former Union finance minister)