The Kelkar report recommended doing away with the entire matrix of tax exemptions, rebates and deductions that make the Indian tax system one of the most complicated in the world. Just a select few with specific social objectives (like those to encourage pension saving, mediclaim, for the dependant handicapped, to encourage educational loans, to give relief to the handicapped) will be retained, if the report is implemented this budget. This had raised a storm when the report was made public two years ago. But anybody who has struggled with bills, investment receipts and insurance policy receipts at tax time will vouch that sometimes it is almost not worth the effort to get that rebate or deduction. Much simpler to have a higher threshold and then pay a flat tax. Savings and investments are then according to the risk return attributes and not tax breaks. The report, in fact, calculates the compliance cost of working in this tax system to be as high as 48 per cent of taxes paid. So if you paid Rs 1 lakh as tax, your cost in doing this was Rs 48,000! The removal of the rebates and deductions will not hurt if the entire Kelkar report is implemented, because along with this removal, the report suggests an increase in the threshold level of taxes. No tax will be paid by a person earning less than Rs 1 lakh a year. Those earning between Rs 1 and 4 lakh will pay 20 per cent. All those earning above Rs 4 lakh will pay 30 per cent, as opposed to all those earning more than Rs 1.5 lakh currently paying a 30 per cent tax. The net effect will actually be positive (according to the report) for the individual. For example, for those earning between Rs 1 and 1.5 lakh a year, the net benefit will be Rs 2,567 in reduction in annual tax liability. Those earning between Rs 3 to 4 lakh a year gain Rs 26,265 in tax cut a year. For those with more than Rs 10 lakh in annual income, the tax cut is Rs 69,597. Looks good on paper, but the danger is of this government implementing one without the other. The tax breaks may go but will the slabs increase in the manner recommended? If the slabs remain where they are and the tax breaks go, the pressure on the middle-class will only increase leading to even more tax avoidance than before. The government may also find it difficult to implement some of the recommendations, like the one that reduces the Rs 1.5 lakh interest deduction allowed on home loans to Rs 50,000. We may be looking at a halfway house, with a gradual movement towards the final recommendations. Something Kelkar said should not be done! Thought for the week: what will happen to the thousands of CAs whose bread and butter is decoding the complicated tax matrix in India? Is the Left going to lobby to let them retain their jobs?
