Mumbai: The Kelkar Committee report on tax reforms has opened a Pandora’s box with all sections crying foul and forcing the Indian government to review the report. What is it all about?

The report has been prepared by a committee headed by Dr Vijay Kelkar, advisor to the Indian finance minister, to suggest tax reforms that will enable the economy to achieve global competitiveness under the World Trade Organisation regime.

The draft of the report, which has appeared in the print media, suggests wide-ranging changes in direct and indirect taxes. The most notable suggestion has been the withdrawal of section 88 tax exemptions. Under section 88, rebates are given for investments in infrastructure and housing. Today, the housing sector is booming basically due to tax exemptions and reduced interest rates; taking away this sop will hit the salaried class the hardest.

In the case of infrastructure, one should cite the case of Konkan Railways, a huge project that was successfully funded due to the rebate in infrastructure bond issued by the Railways. Infrastructure needs huge investments and one of the successful avenues of funding comes from bonds. Infrastructure will also be hit by the withdrawal of rebates.

Recently, the Reserve Bank of India cut its rates, which led to all banks reducing their rates on deposits. Today, the maximum interest State Bank of India offers on its deposits is 6.5 peer cent. With the withdrawal of the tax rebates infrastructure bonds, the fixed income class, as also senior citizens, will be severely affected.

Not a prudent move
The committee has also recommended withdrawal of section 10A and section 10B of the Income Tax Act.

Section 10 of the Income Tax Act provides for exemption of income tax to exports of goods and computer software by units located in free-trade zones, technology parks and special economic zones. Section 10B allows a deduction of profits and gains derived by a 100-per cent export-oriented units from export of goods and computer software.

Naturally, exporters are crying foul. Exports, particularly software exports, have increased tremendously due to tax exemptions and a sudden withdrawal will create problems for exporters. The Council for Leather Exports (CLE), reacting to media reports, says the Kelkar report on direct and indirect taxes lacks thrust on export efforts.

The committee has called for scrapping several export promotion schemes like the Duty Free Replenishment Certificate (DFRC), the Export Promotion Capital Goods (EPCG) scheme, advance license and the Duty Entitlement Passbook Scheme (DEPB). Instead, it has called for only two schemes, one for special economic zones and the other for export-oriented units.

“Withdrawing these schemes will hit the exporters hard as they meet different genuine requirements of exporters,” says CLE chairman Irshad Mirza. The proposal will erode price competitiveness in global markets.

He adds that the Kelkar Committee’s recommendation to reduce the excise duty exemption limit for the small scale sector from Rs 1 crore to Rs 50 lakh in two phases is a discouraging move which will prevent small units in enhancing their production.

Abrupt withdrawal flayed
The Confederation of Indian Industry (CII) is of the opinion that the recommendations of the Kelkar Committee are right in their fundamentals and are in tune with CII’s demand for a simple structure, fewer slabs of duty and focus on processes. However, it feels that the exemptions should not be withdrawn abruptly.

CII has also endorsed the recommendation of a two-slab custom duty structure, stating that products close to the raw material side should attract 10-per cent duty and products close to the finished goods side should attract 20-per cent duty. CII is of the opinion that the recommendation to bring the corporate tax to 30 per cent is generally in line with other economies in the world.

The policy to bring agricultural income into the tax net eventually has also been welcomed. But when and at what level will agricultural income come into the tax net will remain vague, as here the government will be walking on a political minefield.

The report will be reviewed by the government in mid-December 2002. However, given the opposition, it will be challenging for the government to resist populist demands.

Finance Minister Jaswant Singh has already stated that that the government will not renege on its commitments to the people. This leads to the conclusion that the watered-down implementation of the report could on the cards.