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Kelkar's formula hinges on exemptions, depreciation

BS Economy Bureau

The task force on direct taxes, headed by Vijay Kelkar, adviser to the finance minister, has made an assumption of over Rs 5,000 crore (Rs 50 billion) of additional inflows from the changes in the depreciation norms to work out its revenue neutral exercise on direct taxes.

In its consultation paper, the task force has recommended the removal of all tax exemption provisions.

It has estimated that removal of minimum alternate tax and dividend tax would cost the government around Rs 2,000 crore (Rs 20 billion) and Rs 1,500 crore (Rs 15 billion), respectively.

Reduction in the rate of corporate tax from the current 36.75 per cent to 30 per cent is expected to cost another Rs 4,000 crore (Rs 40 billion) to the exchequer.

The total loss of Rs 12,000 crore (Rs 120 billion) is expected to be made up partly by a saving of Rs 6,000 crore (Rs 60 billion) by eliminating the benefits under Section 88 and 80L of the Income Tax Act as well as disallowance of interest for housing loans.

The revenue department also expects Rs 5,000 crore (Rs 50 billion) additional revenue from aligning of depreciation allowances at the same rate as under the Companies Act.

However, while the department had earlier done calculations for MAT and dividend tax, it has no strong estimates to back the gains estimated from depreciation.

For the budget exercise the department undertakes a graded analysis of the revenue implications for different rates, so the department was in a strong position while estimating the impact of different corporate tax rates.

The Shome committee on tax policy has also made an analysis of different tax rates.

Similarly the Y V Reddy committee on small savings has forecast an increase in revenue at above Rs 5,000 crore (Rs 50 billion) as a result of elimination of different exemptions for savings.

However, on depreciation, studies within and outside the department have focussed on the definitional issues without going into the aspect of revenue loss.

This is because the depreciation provisions have come in many places in the Income Tax Act.

However, on the question of sudden withdrawal of the exemption provisions, finance ministry officials said no legal action exists against the department for any changes in the Act.

They said there should therefore be no obstacles in removing the same on technical grounds.

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