The process of budget making in India has always been a secret, highly sensitive mission and a special prerogative of the bureaucrats of the finance ministry. As a result, it has always been shrouded with unnecessary secrecy till the last minute and led to tremendous amount of speculation for nothing. Now, with the Vijay Kelkar committee’s report on the recommended changes needed on direct taxation made public, a new era of transparency has begun. Thus, for the first time in the independent history of the country, the citizens, the manufacturers, the traders and people in the service sector will get to know in advance the Government’s thinking and broad changes likely to take place in the budget. Another big advantage of making the task force report public in advance is that the Government will be able to assess the feedback, experts’ opinion, industry reactions, all in advance, and fine-tune the budgetary proposals.
The Kelkar Task Force (KTF) headed by Mr Vijay Kelkar have tried to increase tax revenue to GDP ratio not by increasing tax rates but by simplifying tax structures, widening the tax base and improving tax administration. The rate of central tax collection is 9% of GDP, while the budget deficit will reach 11% of GDP next year on current trends. Because of multifarious exemptions only 30m of the country's 1bn population pay taxes and most of those are middle class employees on relatively low incomes. The key to making this package revenue neutral is the removal of exemptions which will be accompanied by reduction in corporate tax rates to 30 percent and the result will be revenue neutral to the government. Since these exemptions influence domestic savings, their withdrawal could impact the overall savings projections for the Tenth Plan period which has factored in domestic savings at 26.84 % of the GDP, very much higher than the 23.31 % achieved in the Ninth Plan. If there is a shortfall in savings, the Tenth Plan's investment projections would go away. The Committee recommended two modes of policy measures for reform of the existing scheme of corporate income tax:
Option I : An immediate rate cuts and elimination of exemptions
Option II: A phase-in of rate cuts over a period of time and phase out of tax exemptions and deductions.
After comparing the merits of the two options, the committee preferred Option I for reform of the existing scheme of corporate income tax.
Following is the synopsis of proposed changes in Income Tax by Kelkar Committee and its comparison with the existing provisions
Personal Income Tax
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Section |
Present Position |
Proposed Position |
Remarks |
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Residence in India Section 6(6) |
Resident but not ordinarily Resident: An individual who has not been resident in India in 9 out of 10 previous years preceding that year or has not during the seven previous years preceding that year been in India for a period of 730 days or more. |
Elimination |
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Tax free income limit |
Rs. 50,000 |
Rs. 1,00,000 |
It will remove the multitude of rebates, exemptions which reduce effective tax rate and administrative complexities. But on the other hand when a large number of income earners are covered through service tax and one by six scheme, the increase in exemption limit result in 80 lakhs income tax payers going out of the purview of income tax. |
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Tax Rate |
Where taxable income is Rs. (50,000-60,000) - 10% Rs. (60,000-1,50,000) - 20% More than Rs.1,50,000 - 30% |
Where taxable income is Rs. (1,00,000-4,00,000) - 20% More than Rs. 4,00,000 - 30% |
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Standard Deduction Section 16(i) |
Where income from salary is i) Rs.£ 1,50,000 - 33.33% of salary or Rs. 30000 whichever is less ii)Rs. > 1,50,000 < 3,00,000 - Rs. 25000 iii) Rs.>3,00,000 < 5,00,000 - Rs. 20000 iv) ³ Rs. 500000 - Rs. Nil |
No standard deduction will be available |
Standard Deduction is allowed to grant some relief to employees for expenses made for completing the job In an attempt to simplify tax administration, the logical foundation of standard deduction should not be forgotten. |
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Deduction from house property Section 24(b) |
Where the property has been acquired, constructed, repaired, renewed or reconstructed with borrowed capital, the amount of any interest payable on such capital provided where the property acquired, constructed after 01/04/99 and such construction, acquisition completed before 010/4/2003, the amount of deduction shall not exceed Rs. 1,50,000 |
Deduction allowable in Assessment Year 2004-05 - Rs. 1,00,000 2005-06 - Rs. 50,000 2006-07 - Rs. NIL |
The proposed withdrawal of the incentive on housing loans will be disastrous for consumers as well as bankers. Probably, housing finance is the only growing area and banks will find no viable and safe lending opportunities. In the scenario of limited finances and lesser off-take of money from banks, demand will not increase and the economy will go even more sluggish, may be doomed. |
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Deduction in respect of medical insurance premia Section 80D |
Maximum amount of deduction - Rs 10,000 |
Rebate @ 20% subject to maximum of Rs. 3,000 |
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Deduction in respect of medical treatment, etc. Section 80DDB |
In case of individual for himself / herself or dependent relative and in case of HUF for any member of HUF- Rs. 40,000 |
Section deleted but senior citizen will be allowed tax rebate @ 20% subject to maximum of Rs. 4000 |
Senior citizens with relatively less income would have to bear the burnt of the changes. |
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Deduction in respect of repayment of loan taken for higher education Section 80E |
Maximum deduction allowable - Rs. 40000 |
Deduction will continue to be allowed but on the grounds of Equity the same should be allowed as rebate @ 20% subject to maximum of Rs. 4,000 |
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Deduction in respect of interest on certain securities, dividends Section 80L |
Maximum Deduction - Rs. 9,000 |
Elimination |
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Section 10 |
Interest income from Bonds, Securities, debentures etc. |
Elimination |
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Dividend Tax Section 10(33) |
Taxable in the hands of receiver. TDS @ 10% and surcharge @ 5% under Section 194 to be deducted for dividend paid, credited or distributed after 01/06/2002 if such dividend exceeds Rs. 2500. |
Fully exempt |
Complete exemption of withholding tax on dividends at the shareholder level and no distribution tax at the corporate level would have a severe revenue impact as in the last Finance Bill discussions were held to re-introduce dividend withholding tax after abolishing the dividend distribution tax so that higher income groups are not benefited. However, the brighter side is that it would prop up the stock market and investor sentiments. |
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Long Term Capital Gain on Equity Section 112 |
Flat rate of income tax - 20% If tax computed in the normal manner on listed securities/ units exceeds 10% of capital gains on the said securities, then Under section 112(1) the rate of income tax on long term capital gains rising from transfer of listed securities/ units will be 10% of the gains computed without indexation of cost which will be further increased by surcharge. |
Fully Exempt |
Capital gains tax rates are quite reasonable and reducing rate on equity gains will introduce large distortions and lose revenue. Perhaps reduction in rate of LTCG tax may attract household investors and would give a tremendous boost to the stock market. |
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Rebate on life insurance premia, contribution to provident fund etc. Section 88 |
* Maximum Qualifying Amount - Rs. 100000 |
Elimination |
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Rebate of Income Tax in case of individuals of 65 years or above Section 88B |
100% of Income Tax or Rs. 15000 whichever is less. |
Elimination |
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Rebate of Income Tax in case of women below 65 years Section 88C |
100% of Income Tax or Rs. 5000 whichever is less. |
Elimination |
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Corporate Income tax
Option - I
One time rate cut and elimination of exemptions
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Section |
Present Position |
Proposed Position |
Remarks |
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Tax Rate |
Domestic Companies - 35% and surcharge @ 5% Foreign companies - 40% and surcharge @ 5% |
Domestic Companies - 30% Foreign companies - 35% |
Reduction in corporate tax rate from an effective tax rate of 36.75 per cent to 30 per cent and have a differential tax rate of 35 per cent for foreign companies is a welcome measure. |
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Long Term Capital Gain on Equity Section 112 |
Flat rate of income tax - 20% If tax computed in the normal manner on listed securities/ units exceeds 10% of capital gains on the said securities, then Under section 112(1) the rate of income tax on long term capital gains rising from transfer of listed securities/ units will be 10% of the gains computed without indexation of cost which will be further increased by surcharge. |
Not taxable |
Capital gains tax rates are quite reasonable and reducing rate on equity gains will introduce large distortions and lose revenue.. |
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Dividend Tax Section 115O |
Taxable in the hands of receiver. TDS @ 10% and surcharge @ 5% under Section 194 to be deducted for dividend paid, credited or distributed after 01/06/2002 if such dividend exceeds Rs. 2500. |
No tax on distribution of dividend by a company |
No distribution tax at the corporate level will have a severe revenue impact However, the brighter side is that it would prop up the stock market and investor sentiments. |
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Minimum Alternate Tax Section 115JB |
In the case of an assessee being a company if the tax on total income is less than 7.5% of book profit than book profit shall be deemed to be the total income and tax payable shall be 7.5% of Book profit |
Elimination |
Abolition of Minimum Alternative Tax (MAT) based on book profits is a radical step as time and again the concept of MAT has been debated, introduced and restructured. Corporates have now given up on this and have learnt to stay with this book profit tax. This is a welcome step and would increase corporate retained earnings. |
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Carry Forward and set off of business losses Section 72 |
Allowed to be carried forward for 8 assessment years immediately succeeding the assessment year for which the loss was first computed. |
Unabsorbed depreciation will loose separate identity and will be merged with business loss. Unabsorbed business loss will be allowed to be carried forward indefinitely |
A radical suggestion has been made to restrict the depreciation allowance to the amount charged to the Profit and Loss Account as per the statutory books. This is estimated to bring a revenue gain. This revenue gain could only be an illusory one as the Companies Act only prescribes minimum rate to be charged as depreciation for purpose of Section 205 before declaration of dividends. Nothing prevents a company to charge a higher depreciation so as to synchronise with the tax depreciation rates or even a higher rate based on technical obsolescence. |
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Depreciation Section 32 |
Allowable depreciation as per rates prescribed in Appendix I ( Rule 5) |
Depreciation will be restricted to the allowance charged in the profit and loss account in accordance with the Companies Act. |
The consultation paper has removed the distinction between depreciation provisions under the Income Tax Act and those under the Companies Act in an effort to justify the elimination of minimum alternate tax. As a result, companies which had worked out their tax provisions at lower levels, taking advantage of the depreciation provisions, will now have to factor in a larger tax outgo. |
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Tea Development Account Section 33AB |
Deduction of 40% of profit from tea business |
Elimination |
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Rehabilitation Allowance Section 33B |
Deduction of 60% of the amount of the deduction allowable u/s 32(1)(iii) |
Elimination |
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Reserves for Shipping Business Section 33AC |
Deduction of 50% of the profits derived from the business of operation of ships as is debited to the profit and loss account and credited to a reserve account subject to maximum carried to reserve account shall not exceed twice the amount of share capital. |
Elimination |
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Expenditure on Scientific Research Section 35 |
Deduction shall be:
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Elimination but donations to trusts, institutions etc. engaged in scientific research will continue to allowed bit in the form of a tax rebate like in the case of Section 80G. |
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Expenditure on eligible projects or schemes Section 35AC |
Deduction allowed shall be any expenditure incurred by way of payment of any sum to a public sector company or a local authority or to an association or institution approved by the national Committee for carrying out any eligible project or scheme. |
Elimination but expenditure on projects already approved will continue to enjoy tax benefit in the form of rebate @ 20%. |
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Expenditure by way of payment to associations and institutions for carrying out rural development programmes Section 35CCA |
Deduction allowed shall be payment of any sum
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Elimination |
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Expenditure by way of payment to associations and institutions for carrying out programs of conservation of natural resources Section 35CCB |
Deduction allowed shall be payment of any
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Elimination |
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Interest on borrowed capital Section 36(1)(iii) |
Allowable deduction is the amount of interest paid in respect of capital borrowed for the purposes of the business or profession |
Elimination |
Borrowing cost on acquisition, construction or production of capital asset will be capitalised as per AS-16. Other borrowing cost will be allowed as deduction u/s 37(1) of the Act. |
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Provision for bad and doubtful debts Section 36(1)(viia) |
In respect of a scheduled bank, an amount not exceeding 5% of the total income and an amount not exceeding 10% of the aggregate average advances made by rural branches of such bank computed in the prescribed manner. |
Deduction will be restricted to the amount of provision debited to profit and loss account as audited subject to the maximum amount of provisioning permitted under the prudential guidelines issued by the RBI |
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Newly established undertaking in free trade zone etc. Section 10A |
Deduction allowed is
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Elimination |
Removal of deduction under Section 10A and 10B of the Income Tax Act could change the investment scenario both in the IT services and ITES sector which is slated to grow at 30 per cent. Also, all the FDI proposals in the BPO sector would immediately dry up and one needs to take a serious look at this suggestion as the ramifications are widespread severely impacting employment generation potential. |
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Newly established hundred percent export oriented undertakings Section 10B |
Deduction allowed is 90% of profits and gains from the export of articles or things or computer software for a period of 10 consecutive assessment years. |
Elimination |
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Deduction in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc. Section 80IA |
i)Deduction of 100% of profits and gains from such business for 10 consecutive assessment years. ii) Deduction up to 100 per cent of the profits derived by these undertakings is eligible up to first 5 assessment years and thereafter at 30 per cent for the next 5 assessment years. |
Elimination |
With these fiscal incentives India has hardly seen any substantial investments in infrastructure development. Removal of these fiscal incentives at this juncture might not be a wise move. |
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Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings Section 80IB |
Deduction of 30% of Profits and gains from such business 10 consecutive assessment years |
Elimination |
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Deduction in respect of profits and gains from business of collecting and processing bio-degradable waste Section 80JJA |
Whole of such profit for a period of 5 consecutive assessment years beginning with the assessment year relevant to the previous year |
Elimination |
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Deduction in respect of employment of new workmen Section 80JJAA |
30% of additional wages paid to the new regular workmen employed by the assessee in the previous year for 3 assessment years including the assessment year relevant to the previous year in which such employment is provided. |
Elimination |
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Deduction in respect of inter corporate dividends Section 80M |
Deduction of an amount equal to so much of the amount of income by way of dividend from another domestic company as does not exceed the amount of dividend distributed by the first mentioned domestic company on or before the due date. |
Elimination |
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The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.
