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T. C. A. Ramanujam

T. C. A. Ramanujam on the Kelkar proposals that have been given the go-by

THE Kelkar Task Force had roused expectations that the tax exemption limit for non-corporate assessees would be raised to Rs 1 lakh. It had also recommended the abolition of the three-rate tax structure and the introduction of just two rates, of 20 per cent and 30 per cent. Both these recommendations have been given the go-by. Revenue considerations made it prudent for the Government not to raise the exemption limit.

In India, taxpayers account for a mere 3 per cent of the population against a healthy 46, 48 and 56 per cent in the US, the UK and Australia respectively. The Kelkar panel's two-slab rate structure would have meant a flat tax rate.

While the tax-GDP ratio in India is only 9 per cent, it is 12 per cent in Pakistan, 20 per cent in the US and 34 per cent in the UK.

The ratio of income-tax revenue to GDP is 3 per cent in India and Pakistan, while in the UK and the US it is 14 per cent and 12 per cent respectively.

The Finance Minister, Mr Jaswant Singh, has chosen not to disturb the slabs. He has, however, reduced the corporate surcharge from 5 per cent to 2.5 per cent. This would push the corporate tax rate down from 36.8 per cent to 35.875 per cent — the rates are 35 per cent in the US and Argentina, 34.3 per cent in France, 30 per cent in the UK, Japan and Indonesia, 33 per cent in China, 25 per cent in Germany and 16 per cent in Hong Kong.

The point is that the above 35 per cent rate in India is not the real burden, the effective rate is 19-23 per cent. Indian companies are often accused of conducting business in such a way as to enjoy exemptions than declare normal profits. For instance, why should a fertiliser company start a software unit? Should polyester makers and oil refineries enter into the telecom sector merely to get greenfield project benefits? It is for these reasons that the Kelkar panel had suggested the phasing out or complete removal of most the exemptions from the I-T law. The Government's response to these proposals has been the opposite. Not only have the exemptions been retained and extended, more have been granted leading to more and more distortions in the system. In paras 143 and 144, the Finance Minister observed thus:

"The basic philosophy of these reports is sound. For a modern, forward-looking and in the long run, revenue-beneficial taxation system, the proposals that have been mooted may be the most appropriate. There is need to, eventually, move away from an exemption and discretion-based system to a different, more current order. That is the ideal that the Task Forces, particularly in respect of direct taxes have suggested; a radically new approach to taxation.

"This ideal is difficult to achieve in one leap, and I can scarcely cross the existing conceptual chasm in two. We cannot ignore the commitments made, or wish them away. That is why I choose to bridge the divide. We will, therefore, stay with the basics of the present system of taxation, but we will, indeed have already accepted, most of the suggestions made by the Task Forces... "In the case of non-corporate assesses, Mr Jaswant Singh has removed all surcharges except for those earning income above Rs 8.5 lakh. In that case, the present surcharge of 5 per cent gets doubled to 10 per cent. He has said that this works out to less than 3 paise out of an income of a rupee. The truth is that successive Finance Ministers have chosen to persist in the levy of surcharge for the simple reason that under the Constitutional provisions, the entire collections of surcharge accrue to the Union of India whereas regular taxes will have to be shared with States. The 10 per cent surcharge raises the effective rate to 33 per cent in the case of non-corporate taxpayers with incomes above Rs 8.5 lakh. The maximum marginal rate is no doubt higher at 40 per cent in the US and the UK, but the rate applies to income equivalents of Rs 1,38,40,800 in the US and Rs 19, 50,000 in the UK. Malaysia applies 29 per cent on incomes above Rs 18 lakh.

LTCG

The Finance Minister has proposed tax exemption on capital gains on transfer of equities purchased after March 1, 2003, and sold after 12 months. The exemption is of limited application. It will benefit shareholders in about 9,000 listed companies, of which, 4,000 are known to be shell companies.

Framing a Budget with an eye on the capital market has never helped either the fisc or the market. In the first week after the Budget, the stock market suffered an erosion of Rs 25,000 crore in equity values.

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