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Tax formula will raise disposable income, says Kelkar

BS Economy Bureau in New Delhi

Vijay Kelkar, adviser to the finance minister, has said the Centre would soon announce detailed calculations of the proposals on salaried groups at all income levels to show that there would be a rise in disposable income for each group.

Kelkar made the comments today in a seminar organised by the Federation of Indian Chambers and Industry on India's tax competitiveness.

In response to a question on the status of tax exemptions, he also said all contractual obligations by the government on tax matters will be observed."Any contract signed by the government had to be honoured," he added.

In his speech, Kelkar referred to the criticism on the proposed phaseout of tax exemptions on interest paid on loans for self-occupied houses.

He said it was not wise for the government to forego tax on people who can afford a loan to build a house, which would cost at least Rs 20 lakh (Rs 2 million).

While acknowledging the role of incentives for sectors like exports or IT, he said those should be done through an explicit subsidy or expenditure in the Budget.

Such measures can be debated and voted upon by Parliament, unlike the tax-based exemptions which are hidden.

He said there were some principles on which the two consultation papers on direct and indirect taxes were built.

These were to increase the competitiveness of India Inc, reduce transaction costs, and the costs of debt and risk capital.

The task force was of the opinion that giving tax exemptions for savings would raise the cost of capital for industry and ultimately reduce the availability of savings in the economy.

Kelkar said the tax benefit at the micro level should not be confused with the macro economic needs of the economy.

Kelkar emphasised that though industry was worried that the phaseout of the minimum alternate tax and exemptions would raise their tax liabilities, he said coupled with the current rate of 19 per cent effective tax plus captial gains and dividend tax almost equalled the proposed 30 per cent across-the-board corporate tax rate.

He, however, added that the task force, which had already recieved more than 1,000 e-mails, would re-examine the issues, including that of continuing with export credit till the value-added tax came into force.

He also talked of the need for improving tax compliance and rewarding performance, instead of encouraging rent seeking activities.

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