Taxing proposals

Vijay Kelkar has stuck to his guns. While the final report of the twin task force on Direct and Indirect Taxes does read a bit like a tutori...

Vijay Kelkar has stuck to his guns. While the final report of the twin task force on Direct and Indirect Taxes does read a bit like a tutorial to the less informed critics of the original consultation paper, it has also made out a much stronger case for its recommendations, both on grounds of equity and efficiency. However, by making only marginal concessions to public opinion and sticking to the 8216;all-or-nothing8217; big bang approach the report continues to run the risk of being reduced to a discussion paper, not an agenda for action. Given the inability and the unwillingness of the NDA government to bite the bullet on so many crucial economic reform proposals, it may well be that this report will also meet a dusty death in the finance ministry8217;s almirahs.

The task force has made some concessions to the concern expressed by none other than the Union finance minister himself by conceding that tax concessions may be retained in the case of housing loans to a limited section of the middle income groups. However, the committee has rejected Jaswant Singh8217;s argument that the government cannot 8216;renege8217; on commitments made to the taxpayer by claiming that the doctrine of 8216;promissory estopel8217; does not hold in the realm of tax policy and that the state can change tax policies in the public interest. The Kelkar committee has also stuck to its guns on the proposal to end taxation of dividend incomes in the hands of shareholders. In theory, no one can object to the wide gamut of policy changes recommended by the task force because, taken as a whole, they do pass the test of equity and efficiency in taxation.

The second report on indirect taxes provoked less controversy and was more widely welcomed. Both in the area of direct and indirect taxes the real challenge facing the government is to improve tax administration. Indeed, it is this part of the report that is more important and deserves early acceptance and implementation. If the government can focus all its attention on improvements in tax administration alone it can vastly improve the ratio of tax collections to national income. There are many practical and useful ideas on reducing transactions cost, increasing transparency and making the tax administration more user friendly and less corrupt that must be seriously taken up. The finance minister should not yield to the temptation of accepting some of the more populist proposals, like the ones relating to increasing the minimum taxable threshold income level or ending taxation of dividend income in the hands of the shareholders while not implementing the less popular ones, especially the elimination of exemptions and of a variety of tax holidays. That will go against the spirit of the Kelkar committee8217;s 8216;all-or-nothing8217; approach. Indeed, it will also go against the principle of fairness in taxation.