In this article we will discuss about the Recommendations of the Task Forces on Direct and Indirect Taxes. After reading this article you will learn about: 1. Subject-Matter of Tax Forces on Direct and Indirect Taxes 2. Major Recommendations of the Task Force on Direct Taxes 3. Major Recommendations of the Task Force on Indirect Taxes.
Subject-Matter of Tax Forces on Direct and Indirect Taxes:
In order to initiate the process of tax reforms, Finance Minister Jaswant Singh set up Vijay Kelkar Task Force with the objective of rationalizing cumbersome tax structure so as to reverse the deteriorating trend in public GDP finances, improve tax-ratio by making the tax administration simple and meaningful and also to make the tax base wide with low rates.
While presenting the first batch of supplementary demands for grants to parliament in July 2003, the Finance Minister had proposed the setting up of two Task Forces so as to recommend measures for simplification and rationalisation of direct and indirect taxes. Accordingly, two task forces were set up in September 2002 under the chairmanship of Dr. Vijay L. Kelkar, Advisor to Minister of Finance and Company Affairs.
As per the terms of reference, the Task Force on Direct Taxes was required to submit a consultation paper to the Government containing its recommendation on rationalisation and simplification of direct taxes, improvement on tax payer services and redesigning procedures for strengthening enforcement.
The Task Force on Indirect Taxes was mandated to make recommendations on reduction, recommendations on simplification, reduction in the cost of compliance of Customs and central excise duties, automation of tax administration, simplification of statutory returns, records, procedures for time-bound disposal of matters and different aspects of legal provisions for facilitating tax payers and also to improve tax compliance.
The Task Force on Direct Taxes presented its consultation paper to the Government on November 2, 2002. The discussion paper on indirect taxes was presented on November 25, 2002. These consultation papers were made public for facilitating an informed discussion on tax policy.
In this process, there was an overwhelming response from trade and industry associations and from people of all walks of life. After taking into account the response on tax discussion papers and holding discussions with trade and industry associations and a cross section of people, the Task Forces submitted their final reports to the Government in December 2002.
These Task Forces have made important recommendations on toning up tax administration to put in place a system that is simple, effective and at par, if not better than international standards.
The main recommendations on direct taxes relate to raising of exemption limit of personal income tax, rationalisation of exemptions, abolition of concessional treatment to long term capital gains, abolition of wealth tax etc. In respect of indirect taxes, the major recommendations relate to widening of the tax base, removal of exemptions, expansion in the coverage of service tax etc.
Major Recommendations of the Task Force on Direct Taxes:
Following are some of its major recommendations of direct taxes:
1. Expansion of tax payer services both qualitatively and quantitatively easy access to taxpayers through internet and E-mail and extension of facilities such as Tele-filing and Tele refunds.
2. Extension of PAN to cover all economic agents/citizens.
3. Abolition of block assessment of search and seizure cases.
4. Outsourcing of data entry work relating to certain activities of the tax administration, so as to clear the backlog.
5. Processing of all returns and issue of refunds within four months.
6. Introduction of transparency and objectivity in the process of selection of cases.
7. Establishment of a Tax Information Network on a build, operate and transfer basis to speed up the process of modernisation and consequent simplification and rationalisation of the scheme of tax deduction at source.
8. Outsourcing the preparation and despatch of refunds.
9. Abolition of the requirement of obtaining a tax clearance certificate before leaving the country. Restriction of this requirement to proclaimed offenders.
10. Enhance accountability of officers and staff.
11. Empowering CBDT with appropriate administrative and financial powers.
Personal Income Tax:
1. Increase in exemption limit to Rs 1 lakh for the general categories of taxpayers. A higher exemption limit of Rs 1.50 lakh for widows and senior citizens.
2. Introduction of a two rate personal income tax schedule 20 per cent up to an income of Rs 4 lakh and 30 per cent for income exceeding Rs 4 lakh. Elimination of surcharge on personal income tax.
3. Elimination of standard deduction.
4. Incentive borrowings for housing by providing 2 per cent interest subsidy on all loans below Rs 5 lakh. The second best option is to continue with the tax treatment of mortgage interest for owner occupied houses but with a reduction in the amount of mortgage interest deductible from the existing level of Rs 1,50,000 to 50,000 only.
5. A tax rental agreement whereby States would authorize the Central Government to impose income tax on agricultural income and assign the proceeds to states.
6. Deduction under Section 80CCC for contribution to pension funds to be increased from Rs 10,000 to Rs 20,000. The scope of the section to be enlarged to cover a large number of pension/annuity schemes within the ceiling of Rs 20,000.
7. Elimination of tax incentives under Section 88, 80L and interest income under section 10.
Corporate Tax Reforms:
1. Reduction in corporate tax rate to 30 per cent for domestic companies. Foreign companies to be taxed at 35 per cent. Exemption from tax on dividends and capital gains from listed equity.
2. The general rate of depreciation for plant and machinery to be reduced to 15 per cent from the existing level of 25 per cent.
3. Elimination of minimum alternate tax.
4. Long-term capital gains to be aggregated with other incomes and subjected to taxation at the normal rates. Exemption to continue if the long-term capital gains are invested in a house or in the bonds of national Highway Authority of India (NHAI) until completion of the Gold Quadrilateral and the North-South and East-West corridors.
5. Removal of exemption under Section 33AB, 33AC, 33B, 35, 35AC, 35CCA etc.
6. Income of mutual funds derived from short-term capital gains and interest to be taxed at a flat rate in the hands of the mutual funds.
7. Merger of tax on expenditure in hotels with service tax.
1. Abolition of wealth tax.
Major Recommendations of the Task Force on Indirect Taxes:
Following are some of its major recommendations on indirect taxes:
1. Customs clearance to be based on trust and to be uniformly applied to all importers and exporters.
2. A system of self-assessment of bill of entry by the importer to be introduced.
3. Time limit for processing an import or export document.
4. Levy of central excise to be progressively based upon value addition up to processing stage.
5. Guidelines on determination of cost of production to be issued at earliest.
6. MRP based levy to be expanded.
7. CENVAT credit rules to be amended to abolish the distinction between capital goods and inputs.
8. All Customs and Central Excise Commission rates to fully automate their processes by January, 2004.
1. Multiplicity of levies to be reduced to three, viz., basic customs duty, additional duty of customs and anti-dumping duties. Removal of SAD to be linked to implementation of State level VAT.
2. Zero per cent duty on items like life saving drugs and equipment’s, sovereign imports and imports by RBI. 10 per cent duty on raw materials, inputs and intermediate goods and 20 per cent duty on consumer goods by 2004-05, 5 percent duty on basic raw materials like coal, 8 per cent duty for intermediate goods, 10 per cent duty on finished goods other than consumer durables and 20 per cent on consumer durables by 2006-07.
Duty reductions to the level of 5-10 per cent to start only after the introduction of State level VAT.
3. A duty of 8 per cent on crude oil and. 15 per cent on petroleum products from 2003-04. A duty of 5 per cent on crude oil and 10 per cent on petroleum products from 2004-05.
4. A higher duty rate up to 150 per cent on specified agricultural products and demerit goods.
5. All exemptions to be removed except in the case of life saving drugs, goods of security and strategic interest, goods for relief and charitable purposes and international obligations including contracts.
1. All levies to be reviewed and to be replaced by only one levy, 1.6., the CENVAT.
2. Zero excise duty on life saving drugs and equipment’s, security items, food items and agricultural products, 6 per cent for processed food products and matches, 14 per cent standard rate for all items not mentioned against other rates, 20 per cent on motor vehicles, air-conditioners and aerated water. Separate rates for tobacco products.
3. A uniform rate of 16 per cent of all fibres and yarns, by raising duty on cotton yarn from 8 per cent to 14 per cent and bringing down duty on polyester filament yarn to 14 per cent in four installments.
4. All exemptions to be removed on the textile sector except for fabric woven handlooms, handloom fabric certified as khadi, etc.
5. Duty exemption in respect of small scale sector to be extended to only small units with turnover of Rs 50 lakh. Duty exemption limit for larger SSI units to be brought down gradually to Rs 50 lakh.
6. Uniformity in all State legislations, procedures and documentation relating to VAT.
7. Extension of service tax in a comprehensive manner leaving out only a few services by including them in a negative list. A separate legislation on service tax to be integrated finally with the Central Excise Law.
Main highlights of Kelkar Panel report include:
(a) Exemption limit on personal doubled. Two-tier tax structure proposed 20 per cent tax on income between Rs 1 to 4 lakh and 30 per cent tax on income over Rs 4 lakh;
(b) Standard deduction and surcharge on income tax are to be eliminated;
(c) Tax incentives for savings to go;
(d) Abolition of dividend tax and long term capital gains tax;
(e) Income tax on agriculture is left to states;
(f) Corporate tax is to be reduced from 36.75 per cent to 30 per cent;
(g) Tax rebate on housing is to be reduced to Rs 50,000 from Rs 1,50,000. Alternative suggestion of 2 per cent interest subsidy on housing loans up to Rs 5 lakh;
(h) No duty on life saving drugs. Reduction in import duty on crude oil and petroleum products; and
(i) Complete automation and computerization of customs, excise and tax departments by January 2004 for hassle free procedures.
Thus bowing down to public concerns, the Kelkar Committee on taxation reform appeared to tone down its proposals, choosing to reduce, not abolish, sops on housing loans and pegging the rebate limit on interest payments at Rs 50,000.
The three key features of the direct tax reforms suggested in the report were additional relief for senior citizens and windows, fiscal support for low income groups and encouragement to saving in the form of annuity and pension schemes.
Apart from total automation of tax administration the panel on direct taxes has sought to move towards an institution of a simple and transparent system of taxation, lowering transaction cost of revenue collection, alignment of incentives and also widening of tax base.
One of the important weaknesses of Indian tax system is the exemptions. This has not only allowed vested interests to perform but also become a breeding ground for corruption besides narrowing the tax base. In order to deal with the situations, Kelkar panel has rightly suggested that no tax exemptions be given to charitable institutions rather genuine institutions been given grant by the government.
However, the broad thrust of the Task Force recommendations is directed towards simplifications of the tax policy, reduction of tax rates and removal of anomalies along with radical improvement of administration of tax collection system.
But the industry and personal income tax payers although welcomed some of the recommendations but they were not happy with the proposal of withdrawal of exemptions and concessions.
Unfortunately, the vested interests are so strong and well entrenched that the well planned criticism raised from different quarters forced the Finance Minister and Vijay Kelkar to go on back foot and thereby roll back some of their proposals.
Although some of the suggestions like simplification of tax policy, improvement in tax administration can be accepted without any hesitation but some other recommendation need serious considerations on rational line.
Poor enforcement system is another handicap of Indian tax system which Kelkar Panel failed to address. Narrow coverage of the tax net is mostly resulted from their weakness.
Although the Kelkar Panel felt the need for widening the tax base it has not been all to recommend any practical measure to tackle this problem of tax evasion for which a corruption-free, autonomous, powerful tax administration is badly required. This requires avoidance of political interference in the tax administration for smooth running of the taxation machinery.