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Kelkar panel may cut lowest income tax rate to 15%

Subhomoy Bhattacharjee in New Delhi

The Kelkar task force on direct taxes is likely to lower the tax rate in the Rs 100,000-200,000 income bracket from 20 per cent to 15 per cent to moderate the impact of the removal of exemptions on savings instruments. The Kelkar-led task force on indirect taxes is in favour of relaxing the restrictions on export-oriented units and export-processing zones on sale to domestic tariff areas.

Both the task forces on direct and indirect taxes are currently obtaining feedback from industry and other interest groups. The one on direct taxes will be meeting in New Delhi on Thursday to take stock of the changes suggested.

According to high-level sources, this will be the first meeting of the panel, after the release of its consultation paper, to discuss the suggestions received from different quarters in meetings as well as those that have come on e-mail.

According to the direct tax panel, the tax calculations made for the different income tax brackets show that the removal of the exemptions under Section 88 of the Income Tax Act and the elimination of the standard deduction have become burdensome for the lowest category of Rs 100,000-200,000.

In the range below Rs 150,000, the taxpayers will be subjected to the same rates of 20 per cent as of now, but without the savings avenues to reduce the burden. A reduction in the proposed rate from 20 per cent to 15 per cent will, therefore, correct this anomaly.

The indirect tax panel is likely to suggest that the schedule for export-oriented units and export processing zones to reduce the extent of their sale to domestic tariff areas, which is supposed to come down to 10 per cent by 2006, should be dispensed with.

The members recognised that the commitment, coupled with the proposed 75 per cent Customs duty on such sale, was a double whammy for the units. But the recommendations to phase out export incentives are not going to be disturbed.

The task forces have decided to keep their other recommendations in the consultation papers largely unchanged. The revenue department has informed the task forces about the potential loss of Rs 1,700 crore (Rs 17 billion) per year in indirect taxes because of the proposed lowering of the special excise duty by 4 per cent every year. The tax regime will also give no compensatory setoffs against such losses.

Yet the panel, close to finalising its report to be put on the website next week, will also keep unchanged its recommendation to remove incentives for industry in backward areas and infrastructure sectors.

Sources said there were no differences between the recommendations and what Finance Minister Jaswant Singh had said about maintaining the government's contractual obligations.

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