Kelkar Task force submits revised recommendations

Our Economy Bureau
24 July 2004

New Delhi: The Kelkar Taskforce has recommended that fiscal consolidation should henceforth be `revenue-led'' rather than based on reduction in expenditures.

In 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."

The 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 and women.

For 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.

Another 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."

Within 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."