Acceptance of the recommendations of the Vijay Kelkar-led Task Force on Direct and Indirect Taxes could result in the middle and working classes giving up the habit of savings.
IF a list is made of the sections of society affected by the recommendations of the Task Force on Direct and Indirect Taxes, headed by Vijay Laxman Kelkar, Adviser to Finance Minister Jaswant Singh, it will start with the middle and the working classes, followed by senior citizens and women taxpayers below the age of 65. Only the corporate sector and big business houses are to benefit from the pro-rich recommendations.
The recommendations, submitted to the Finance Minister on November 2 in the form of a discussion paper, have little good news for the middle class. It is likely to be hit hard by the recommendation to phase out the tax exemption on the interest portion of housing loans. Kelkar has recommended that tax exemption be reduced to Rs.1 lakh in 2003-04 from the present Rs.1.5 lakhs and to Rs.50,000 in 2004-05 and nil in the following year. This might result in the government denying the people the option of owning a house. The recommendation comes when the middle class has been hit hard by the falling interest rates. Bank deposits fetch low interest and investment in growth mutual funds is negligible. In insurance, single premium assured returns policies are either being withdrawn or their yields are being reduced substantially. Moreover, if the government accepts the decision to do away with tax exemptions on housing loans, it will also affect the construction industry, which has done well even during the economic downturn. This, in turn, will have a multiplier effect on other industries such as cement and steel.
The Task Force has recommended that standard tax deductions in the case of salaried employees with annual incomes below Rs.5 lakhs be abolished. The reasons given by the panel were that salaried employees are eligible for tax-free conveyance allowance up to Rs.9,600; most employers provide books and periodicals in work place; expenditure on newspapers and periodicals is reimbursed by the government in case of senior officers; in the corporate sector, the expenditure for newspapers and periodicals for employees is allowed, deduction without it being treated as a perquisite. The Task Force noted: "Once conveyance expenditure is separately exempted from taxation, it is difficult to visualise any other employment-related expenditure other than personal in nature." Such a view is unfair to the salaried class, especially when compared with businesspersons, who can claim various types of expenses incurred, wholly and exclusively for earning incomes.
The suggestion to abolish tax shelters would mean that the middle class would have to give up the habit of savings. Since most middle class taxpayers go in for investment in the Public Provident Fund (PPF), insurance policies or in infrastructure bonds in order to receive tax exemption, investment in all such schemes will suffer if tax exemptions are withdrawn. When no tax exemptions are available on investments, the spending power of the taxpayers would increase. But this, in turn, will also make the salaried class vulnerable. This might also result in a situation where the salaried class does not have any pension norms to fall back on. Hence financial advisers are suggesting that a detailed draft of pension reforms be put in place before Kelkar's recommendations are implemented. Women taxpayers and senior citizens would also find themselves in a tight spot if the recommendation for the withdrawal of the tax benefits for them is accepted.
THE Task Force came up with such decisions as it was set up with a limited mandate - to correct the "many anomalies in the direct tax system". Keeping this in mind, the Task Force has been able to come up with suggestions that will make it possible to calculate liabilities easily. The suggestions to hike the personal income tax exemption limit to Rs.1 lakh, the introduction of a two-tier tax rate of 20 per cent and 30 per cent, applicable to incomes below and above Rs.4 lakhs respectively, and the withdrawal of tax exemptions need to be seen in this context. On the other hand, this has meant that the two essential ingredients of long-term perspective and some synchronisation with the growth targets set by the government are absent from the recommendations. The decision to generalise the tax exemption limit makes little sense when placed against the fact that now the majority of the tax assessees will be out of the tax net. This means that the Income Tax Department will lose its database of actual and potential taxpayers. Such a database has in the past been helpful in locating more taxpayers and detecting evasion. Worse, if the tax base is narrowed, it will prove detrimental in the long run, especially going by the promises in the Tenth Five Year Plan to generate more jobs in the unorganised sector.
The recommendation to tax the agricultural income of non-agriculturists is a politically unpalatable one. The move is bound to be resisted not only by the politically influential farm lobby but also by several politicians who pass on a major part of their non-agriculture income as farm income and claim tax exemption. In separate statements, Union Agriculture Minister Ajit Singh and Bharatiya Janata Party president M. Venkaiah Naidu criticised the suggestion to bring agricultural income into the tax net. P.N. Vijay, convener of the BJP's economic cell, said: "It is perhaps not the right time to talk of taxing agriculture income. Farmers are already restive with the structural changes being introduced in agriculture such as hiking the user charges for power and water."
Only the corporate sector seems to have gained something from the recommendations. Apparently, the Task Force seems to be convinced by the argument that the economy can be revived by boosting the corporate sector. It is even ready to push the middle class to the volatile equity market to achieve this end. The corporate sector will benefit from the recommendation to reduce its tax rate come from 36.5 per cent to 30 per cent.
It is doubtful whether the BJP will have the political will to implement the recommendations. When the BJP and its allies lost the Assembly elections in Uttaranchal, Uttar Pradesh, Punjab and Manipur and the civic polls in Delhi in February and March this year, the then Finance Minister, Yashwant Sinha, had to face the charge of alienating the middle class through his economic policies. On November 11, Jagdish Shettigar, former head of the BJP's economic affairs cell, warned that the Kelkar Task Force's suggestion to abolish tax exemptions, if implemented, could prove to be "politically costly" for the National Democratic Alliance (NDA) government. "We cannot accept the suggestion since it will affect a large number of middle class people who form the bulk of our voters," Shettigar said. He added: "There might be economic rationale behind the suggestion, but one has to see the political compulsions too. Economic rationale and political compulsions do not go hand in hand." Two days after Shettigar made the statement, the BJP appointed a committee to study the recommendations of the Task Force. Shettigar, along with other critics of the Task Force, including P.N. Vijay, are members of the committee. The committee, headed by party general secretary Rajnath Singh, will submit its suggestions to Venkaiah Naidu.
INTERESTINGLY, the Task Force has recommended that there is a need to change the `identity' of the Income Tax Department, which has become identified with its search `raids'. In its report on Direct Taxes, the Task Force notes: "Search and seizure cannot be a way of life for the civilised society." Search raids account for a mere 1 per cent addition in revenue but they have become a source of fear for evaders. It has acknowledged the fact that in the Income Tax Department "the most sought after posting for most of the officers in any grade is in the search and seizure wing". According to the Task Force, a possible solution to this problem could be that "search and seizure be used in rare of rarest cases, where alternative measures of investigations have failed". The Task Force has also made a case for abolishing administrative exercises such as obtaining an income tax clearance certificate before leaving the country. It points out that the certificate has led to "incessant complaints of harassment and unethical behaviour".
On the whole, if the objective is to make taxpayers' lives easy, the Task Force has achieved the objective. Where it has erred is in ignoring the political compulsions and larger fiscal issues of the country in its calculations.
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