KELKAR: ‘Replace scores of current taxes with one simple, powerful tax’
To those who criticised Finance Minister P Chidambaram’s Budget as unimaginative and a mere continuation of past policies, the reason has now become clear: the real reform has just been unveiled and it’s so radical that it’s been released six months ahead of Budget 2005 so that it can be debated and examined before the country is ready to digest it next year.
The Kelkar Task Force Report released today, which will form the basis of reforms, speaks of getting rid of sales tax, stamp duty, octroi etc and replacing such taxes with a single Goods and Services Tax.
The tax would involve states and the Centre getting together for a national value-added tax (VAT) on goods and services, replacing the Central VAT as well as the state sales taxes.
The idea is to impose a 12 per cent Central VAT on almost all goods and services. This is lower than the existing 16 per cent CENVAT on goods. An 8 per cent state VAT is also proposed.
The proposal, based on sound economic policies, can give India the ideal tax system. But it is also the most challenging to implement.
The proposal came about following the realisation that even if the present pace of improvements in the tax structure and GDP growth continue, the Fiscal Responsibility and Budgetary Management (FRBM) target of eliminating the revenue deficit would be at 1.66 per cent in 2008-09.
One path to eliminate the revenue deficit by 2008-09 would have been to savagely cut expenditure. This is a painful way of adjustment, which might be acceptable in a crisis, but not under normal times. It will also not be possible to do this under the CMP, which has promised an increase in expenditure on education and health.
Another tactic could be to impose ‘expedient’ taxes, to pick a few convenient victims — like telecom or banking or the stock market — and extract resources from them. But even though taxing salt might be easy, it does not make it correct. The economy would get distorted and growth and productivity reduced.
This left the Task Force with the channel of sweeping tax reforms that would remove distortions in the economy and achieve higher GDP growth.
Higher growth would itself make it easier to handle the existing burden of debt. For the fiscal adjustment not to hurt growth, a front-loaded revenue-led path is proposed. While the need for expenditure reform and the basic principles of reform are outlined, the focus is on getting out of the messy tax regime existing today.
The Indian system, if it follows this path, could become world-class with the ease and efficiency of countries like Canada. It is designed to bring down the cost of compliance and reduce tax evasion. It would reduce the tax burden of Indian exports and bring it at par with the much lower tax burden in China.
The Task Force addresses concerns that have plagued the middle class for many years. Most of the times when the government has tried to raise taxes, it has done so by increasing the tax burden of the salaried sections.
The tax proposals in the report raise taxes by reducing the tax burden of the salaried sections, and increasing the tax burden on others who have, until now, managed to get the benefit of the large number of exemptions and loop-holes that exist in the system.
At the current levels of compliance, there is therefore a reduction in revenue of over Rs 11,000 crore. This means the burden of income tax will go down by this amount. Revenue receipts are expected to improve over the next two years or so, as compliance improves.
Other than the tax evaders, the biggest losers under the new proposals will perhaps be chartered accountants and tax lawyers. The new tax structure simplifies tax compliance and reduces their role. The tax reforms will also drastically reduce the powers of officers in the tax department.
Under the GST regime, IT systems will track corporates, matching various sources of information, replacing raids by tax officers. The scope for corruption will be reduced. The new regime will not be easy to implement. If the UPA does decide to implement the proposals, the two big next steps would be to have a consensus with the states and to get cracking on administrative side sorted out.
States stand to gain a lot but to get them to cooperate, Kelkar proposes a ‘‘grand bargain’’. They are being given a share of service tax collections, which they currently don’t get. They are also being given the tax administration and IT systems needed for the implementation of the state VAT.
The Kelkar report is a beautiful vision. But while it points to new successes in tax administration such as the TIN, one recalls how both the Finance Ministry and the state governments have bungled on the issue of state VAT. Both must change their way of thinking to actually execute on the elegant designs of the report.