Search the Internet          Tips  Sites: Finance, Investment

Kelkar defends lifting of tax exemptions

Chairman of the task forces on tax reforms Vijay Kelkar defended the proposals for lifting tax exemptions on savings, saying it was leading to higher interest rate structure in the economy.

"A tax savings bond carries higher interest rate due to the imputed costs of exemption compared to other instruments having lower rates, taking the real rates in the economy to a higher level," Kelkar, advisor to Finance Minister Jaswant Singh, said on the sidelines of a Confederation of Indian Industry seminar on tax on Thursday in New Delhi.

For instance, interest rate on RBI Relief Bond is about eight per cent but considering the tax exemption the rate of return is more than any other bonds where tax is deducted at source.

This differential in rate of return was forcing other financial players to offer a higher interest rate on their bonds, which in turn raised the real interest rate in the economy.

Kelkar said such tax incentives might be rational at the micro-level, but considering the overall higher interest rates structure in India compared to international markets, it might be irrational at the macro-economic level.

Pointing out that the consultation paper submitted to Finance Minister Jaswant Singh was slated for changes before the panel submits the final report, he said present tax system was "extremely" complex leading to revenue leakage and abuses.

"The central idea of reviewing the tax structure was to cut transaction costs for better fiscal management and fuelling growth and employment simultaneously," Kelkar said, adding the amount spent to increase tax compliance comprised 50 per cent of the transaction costs.

ALSO READ:
More Money Headlines