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Kelkar panel for 2-slab Income Tax rate

The task force on income tax formed under Vijay Kelkar, advisor to the finance minister, has suggested drastic steps to end "exemption-raj", proposed 2-slab income tax rates of 20 and 30 per cent with a Rs 1,00,000 exemption limit and recommended bringing in agricultural income of non-agriculturists under the tax net.

The consultation paper on Direct Taxes submitted by the task force to Finance Minister Jaswant Singh on Saturday mooted wide-ranging reform of Corporate Tax by reducing the rate to 30 per cent from the present 36.75 per cent for domestic companies and to 35 per cent from 40 per cent for multi-national companies, besides abolition of dividend tax and minimum alternate tax.

The panel proposed abolition of wealth tax and long-term capital gains tax while scrapping standard deduction and tax incentives on savings.

Giving details of the recommendation, Kelkar told reporters the main tax policies suggested raising exemption limit to Rs 100,000 from Rs 50,000 now, a 20 per cent tax on income of Rs 100,00-400,000 annually and 30 per cent for beyond Rs 400,000.

"Indian taxation system is now in the grip of exemption-raj as the Indian economy was earlier under licence raj, which leads to leakages, unaccountability and lack of transparency," he said, adding the measures though reduce tax rates, would be revenue neutral with removal of exemptions.

Kelkar said the task force was in favour of a 'big bang' approach to carry forward the direct tax reforms. Taking into consideration the political aspects for carrying forward such drastic changes, it also provided a second option of phasing out the exemptions and reduction in tax rates in a three-year period.

The task force, which made its recommendations in two volumes, suggested a Tax Information Network system through the nationwide network of National Securities Depository Ltd to tone up tax administration, enabling taxmen to focus on inspection and assessment only.

The TIN system would assess the tax deducted at source of all tax payers, process advance tax and refunds.

Kelkar said the government could outsource NSDL's hardware and software infrastructure, which can be readied within four months.

The panel, which has already submitted its recommendations on indirect taxes, has suggested two-slab customs and excise duties doing away with most exemptions and a two-year framework for implementation.

On the controversial issue of taxing agricultural income, Kelkar said, "The agriculture income of non-agriculturists were being increasingly used as tax-shields for laundering funds resulting in leakages of revenue of Rs 1,000 crore annually."

To tax these income, he said, the states could pass a resolution under Article 252 of the Constitution authorising the Centre to impose tax on agriculture income. All taxes collected by the Centre, net of collection costs, could be assigned to the states, he added.

For this purpose, a separate tax return form should be prescribed for tax-payers deriving income from agriculture income, he said, adding these recommendations would help additional resource mobilisation by states without touching 95 per cent of the genuine farmers, who would in anyway not fall under tax net when exemption limit is raised to Rs 1,00,000 per annum.

The proposed rental arrangement with states could be packaged with the rental arrangement for services, which is now being proposed as a measure to compensate states for any possible revenue loss while implementing nationwide value-added tax from April 2003.

Elaborating on reform of personal income tax, Kelkar said dividends received by individuals are proposed to be fully exempt.

Besides, it favoured eliminating tax rebate schemes under Section 88 of Income Tax Act for savings, Section 88 B for senior citizens and Section 88 C for women (additional Rs 5,000 standard deduction) and exemptions under Section 80 L for interest income and dividends and Section 10 for interest income from bonds, securities and debentures.

Tax sops for housing loans is suggested to be phased out in three years. It is proposed to be reduced to Rs 1,00,000 in 2003-04 from the present Rs 1,50,000 and further to Rs 50,000 in 2004-05 and nil in the next year.

The residential status of 'resident but not ordinarily resident' would be eliminated.

The income-based deduction under Section 80 D should be converted into a tax rebate at 20 per cent subject to maximum Rs 3,000 per annum.

The benefit of deduction under Section 80 DDB should be withdrawn. However, consistent with international practice and special circumstances of senior citizens, deduction under medical expenses may continue to be allowed as tax rebates at 20 per cent with maximum Rs 4,000.

The income-based deduction for education expenses under Section 80 E should also be continued at a rate of 20 per cent with a maximum Rs 4,000.

On tax administration, Kelkar said amendment to the Income Tax Act was needed to simplify procedures and make provisions for allowing appeal against all orders and intimation imposing additional burden on tax payers.

On the provisions for search and seizure, the panel favoured abolition of the scheme of rewarding officers engaged in these activities.

It also said no seizure of stock shall be made by any agency so as to disrupt the manufacturing and delivery schedule of export goods barring certain exception based on prima facie evidence.

On refunds, it proposed replacement of existing cumbersome and manual systems by more efficient IT-based systems. A designated bank should be authorised to issue computerised refunds on the lines of dividend and interest warrants issued by companies, it added.

To improve collections, banks should be networked to the TIN for receiving payments online besides instant accounting of tax collections and digitised TDS returns.

It also proposed four-month time frame for processing all tax returns and with operation of TIN, the tax department should concentrate on its core function of assessment and inspection.

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