New Delhi: The Kelkar Taskforce has recommended that
fiscal consolidation should henceforth be `revenue-led''
rather than based on reduction in expenditures.
its report presented to the finance minister, P. Chidambaram,
the Taskforce on Implementation of the Fiscal Responsibility
and Budget Management (FRBM) Act, headed by Vijay Kelkar,
has observed that slashing government spending "would
be contractionary for the macro-economy," whereas
"raising tax revenues is likely to be less contractionary."
The report has even argued that the government should
enhance capital expenditures "in order to counter-balance
the contractionary effects of fiscal consolidation."
report favoured revenue mobilisation through low and few
tax rates, alongside widening of the tax base and shifting
the incidence of taxation upon consumption. There will
be only two marginal rates: 20 per cent for income levels
of Rs 1 lakh to Rs 4 lakh and 30 per cent for incomes
above Rs 4 lakh. The marginal rate would be nil on income
levels up to Rs 1 lakh. At the same time, the standard
deduction available to salaried tax payers will be done
away with and all tax exemptions are to go, barring those
relating to housing loans and schemes for senior citizens
corporates, the Taskforce has suggested a reduction in
the tax rate from 35.875 per cent to 30 per cent for domestic
companies, along with a lowering of the general depreciation
rate from 25 per cent to 15 per cent. All existing tax
incentives will be `grandfathered,'' i.e., new units will
not be entitled for such benefits.
suggestion made by the Taskforce is to have goods and
services tax, which will be a single country-wide value
added tax (VAT) covering virtually all goods and services.
Further, there will be no demarcation between goods and
services on which the powers of taxation rest only with
the centre or the tates. Instead, the Taskforce has envisaged
a `grand bargain,'' whereby states will have the power
to tax all services concurrently with the centre, and
"both Central and State Government would exercise
concurrent but independent jurisdiction over common or
almost common tax bases extending over all goods and services,
and in both cases, going up to the final consumer."
this framework, the report has proposed a three-slab ad
valorem tax rate structure - a floor rate of 10 per cent
(6 per cent levied by the centre and 4 per cent levied
by States), a standard rate of 20 per cent (12 per cent
plus 8 per cent) and a peak rate of 34 per cent (20 per
cent plus 14 per cent). As per this, the total tax burden
on most goods would work out to 20 per cent, which "compared
favourably with the standard VAT rates seen in OECD countries."
the centre''s standard rate would work out to 12 per cent,
which is below the existing Cenvat rate of 16 per cent.