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Rationalise minimum alternate tax, Kelkar panel to govt

BS Economy Bureau in New Delhi

The task force on direct taxes, headed by Vijay Kelkar, adviser to finance minister Jaswant Singh, is likely to recommend lowering of income tax rates, abolishing dividend tax, rationalisation of minimum alternate tax and phasing out of exemptions.

According to finance ministry sources, the task force would introduce certain measures to ensure that abolition of dividend tax and MAT rationalisation would be revenue neutral. Phasing out exemptions would, however, yield substantial tax receipts to the government.

While the income tax rates of 10, 20 and 30 per cent may not be tinkered with, the slabs may be raised. At present, annual income in the Rs 50,000- 60,000 band attracts 10 per cent tax, in the Rs 60,001-1,50,000 band 20 per cent and over Rs 1,50,000 a tax rate of 30 per cent.

Sources said the threshold levels at which the 10, 20 and 30 per cent tax rates would be imposed are likely to be raised. The Parthasarthi Shome advisory group on tax policy and tax administration had also made a similar recommendation.

With the committee set to emphasise on removal of exemptions, sources said it is likely that the MAT rate too might be rationalised. At present, companies with zero tax liability pay MAT at the rate of 7.5 per cent. If most of the exemptions are done away with, there is a case for reducing MAT, they said.

The Shome committee had, however, said that MAT should be imposed on a combination of net worth and dividend distributed by the company and not on its book profits. There was scope for fudging the book profit figures and further the present MAT structure was in favour of promoters who paid themselves good dividends but tax at 7.5 per cent to the government.

The 10 per cent (without surcharge) dividend tax at the hands of shareholders has been one of the most controversial issues.

Former Finance Minister Yashwant Sinha in the Budget for 2002-03 had shifted the onus of paying dividend tax to the shareholders from the companies, for which he attracted a lot of flak.

Dividend tax is often seen as a double taxation of the corporates by the government. Industry chambers and companies have year after year lobbied for removal of dividend tax.

However, given the fact it yields substantial revenues of about Rs 10,000 crore (Rs 100 billion) a year to the exchequer, the government had refrained from doing so.

The Kelkar task force would take a stern view on exemptions. Sources said a sunset clause viz, a time period over which the exemptions should be phased out is likely to be suggested by the task force. Exemptions available to charitable institutions, which cost the government over Rs 5,000 crore (Rs 50 billion) a year are likely to be knocked off.

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