Dr Kelkar’s final report, under active consideration by Finance Ministry for implementation come April 2005, starts off with a very bad premise.
In his ’Summary of Recommendations’, Kelkar makes a grossly inaccurate opening remark , that the adminstration should ’’render quality tax payer services to encourage voluntary compliance’’.
Ofcourse not; ensuring delivery of ’service’ for the tax paid is what is going to ensure voluntary compliance!
In summary Kelkar proposes an individual income tax at 30% for all income above Rs 4lakhs (after removing almost all deductions be it for savings/insurance/health/education) & what is worse, progressively an additional indirect tax of 16% on you and me, the end consumer of almost all services, by way of GST.
Kelkar often highlights in his report, the fact that the Individual Income Tax rate in India shall be lower than what is charged in Western world, thereby justifying proposed steep increases. He never utters a word that for the tax collected, the Western world Governments offer premium public utility ’service’ to the tax paying citizens, and not mere ’taxpayer (administrative) service’, be it secured quality education, old age health care, unemployment doll etc etc. None of this is present in India & going by the plundering by the bloated administration that eats upward of 60% of all revenue as it trickles up to apex collection kitty and then down to downstream spend, there is no justification to raise the direct and Indirect taxes of individuals, particularly of salaried middle-income class, that too taking away almost all present tax exemptions, as proposed.
Industry, while broadly endorsing the approach, is also lamenting the proposed 30-35% corporate tax after removing current ’exemptions’ (read, indeed as Kelkar rightly says, complicated loop holes that entails an increased good-for-none compliance cost); CII and other Industry fora are busy lobbying for a reduction of this to 25%.
Who will make the case for individuals? At 30% for income above 4Lakh the burden is substantial as almost all present tax saving avenues are being closed. Indeed it is great to simplify tax computation & thereby reduce cost of compliance by removing all such exemptions; but should this not be matched by a ’real’ reduction in max tax percent say to 25% for what we know is (and going to be) service we receive from our Govt after paying for its expensive & inefficient bureaucracy?!
Additional note, while Industry gets credit for all services it consumes as it value adds, the ultimate customer, you and me, is going to bear the proposed burden of 16% GST on anything that we consume.
Industry (in its recent debate in powerful lobbies & forums) claim that imposition of dividend distribution tax on them is unfair after paying corporate Income tax. Earlier mechanism of collecting in the hands of recipient is more costly and prone to leak as the numbers of individual from whom to collect dividend tax itself will sap half the revenue; so the FM shenanigans like Kelkar, hit upon the (now tried & tested) formula of collecting at source-industry, which indeed is efficient. They even present it with a sweet pill that tax on corporate for Individual Dividend distributed shall only be 20% unlike 30% dividend distribution tax for inter corporate income distribution!
Nevermind the fact that irrespective of tax/income status of individuals receiving the dividend, the Govt is smiling all the way to the bank at 20%, thereby cutting on the realised income of ultimate end Indian Individual.
If Corporates can lobby on the ground of Double Taxation ie Corporate Income Tax and Dividend Distribution tax and thus abolish later, consider this: Is Kelkar not taxing us twice when we paid Income tax @ 30% and later when we bought anything at all, paying 16% GST on that.
I hope learned Individual’s tax consultants came to the rescue of Individuals ahead of Feb 2005 Budget presentation to make a case for fair tax percent of 25, instead of 30%, even after the well intentioned and deserved lower end concessions of nil tax till 1 Lakh and 20% till 4 Lakh income.
Why does not the Govt cut its Bureaucratic flab by an easy 20-30%, ironically without any (tax or otherwise) service level reduction that is absent, to give recurring cost reduction to offset revenue loss due revision of 30% tax rate to the fair 25%. This by the real Revenue expenditure reduction, thereby demonstrating true Fiscal Responsibility (by Rev expenditure reduction) rather than the mere ’information availability process’ of FRBM, which by the way, is a good first step.
For those that would be genuinely worry if the 25-20% reduction will hurt the country, Kelkar himself offers a way out in his closing remarks of ’Summary of Recommendation’
’’10.72. Overall, the recommendations are revenue neutral at the existing level of compliance. To the extent the new simplified and liberalised tax regime will induce compliance, the revenue gains are likely to be substantially higher and it will enhance bouyancy by widening the personal and corporate income tax bases.’’
Kelkar’s proposal as-is is revenue neutral without considering a)improved compliance, b)widened tax base! A max tax rate cut to 20% SHALL surely not hurt the economy/country in the long run, if we have the guts to sack 20-30% of bureaucracy, as more compliance will be voluntary, given the reasonable tax rate, but commensurate with the (lack of) service provided by the Govt, thus not necessitating the corrupt enforcers such as CBDT, the Inspectors of Inspector Raj dreaded by none other than Dr Manmohan Singh besides all India common man!!
Additional Reference:
The full Kelkar report: https://finmin.nic.in/kelkar/
Read more comprehensive review of Kelkar reforms @:
https://mouthshut.com/readreview/58330-1.html
Kelkar Tax reforms largely endorsed by CII and Industry