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The Kelkar show: cart before the horse

January 14, 2003

Why is it that official committees come up with only half-sensible suggestions?

One reason could be that they have to do a hatchet job on behalf of the person or authority appointing them.

Vijay Kelkar, advisor to the finance ministerIt's like the chief executive office of a company who wants to reduce the headcount, but calls in a consultant anyway to validate his ideas and provide an external justification for what he was planning to do all along.

Take the case of the Kelkar committee. Whatever might have been the claimed purpose of setting it up, the finance minister's unstated brief must have been to find ways to earn more tax revenues, not less.

With a 6 per cent fiscal deficit staring him in the face, it is unlikely that Finance Minister Jaswant Singh was planning any giveaways -- unless they are incidental to the larger goal of raising tax revenues.

If this was the real brief, the Kelkar committee has done a fairly good job of trying to find ways to expand the tax base, increase tax compliance and make revenues buoyant. It also deserves the brickbats it got in the bargain.

From an individual taxpayer's point of view, what the committee has ended up doing is offer the usual ideas for improving tax administration, accept wayward propositions as enlightened principles, and justify several proposals on the basis of dubious maths.

The dubious maths first. The truth is the proposals will bring people who are legitimately out of the tax bracket now back into it.

A person earning up to Rs 1.5 lakh (Rs 150,000) per annum today already enjoys a tax exemption up to Rs 1 lakh (Rs 100,000) due to standard deduction (Rs 30,000), conveyance allowance (Rs 9,600) and sundry benefits like the concessional treatment of house rent allowance.

He is not going to be thrilled to learn that the basic exemption will now go up to Rs 100,000. But, er, the interest he earns on bank deposits will be subject to tax. Thanks, and no thanks.

As for those at higher income levels, the hit could be worse if the tax deduction on housing loans is reduced.

A reduction of Rs 1 lakh (from Rs 1.5 lakh to Rs 50,000) on interest paid on housing loans, plus the removal of standard deduction, will straightaway make you liable to pay more tax in income brackets up to Rs 5 lakh (Rs 500,000).

For what is happening is that you have lost two deductions worth Rs 1.2 lakh (Rs 120,000) and got a substitute worth Rs 50,000 -- which is the increase in basic tax exemption. How is that a benefit?

Effectively, what the Kelkar committee has done is provide an intellectual justification for the government to earn more tax revenues. That was what it was asked to do, and that is what it has delivered.

Another dubious idea the committee ratifies is that it is better to have more assessees than less. Is it? If one were to apply the 4:1 rule to tax administration, 80 per cent of your revenues come from 20 per cent of assessees.

So how does it make sense to mindlessly expand the direct tax assessee base?

When the number of taxpayers starts expanding to the kind of levels we are seeing with the implementation of one-by-six scheme -- we have thrice as many assessees today as 10 years back -- you are more likely to get more paperwork and higher tax-collection cost, not more revenues.

This is completely contradictory to the committee's oft-repeated claim that it wants to improve taxpayer services. You cannot do that when you have so many of them.

I am also disappointed that the committee has bought the shop-worn theory that tax evasion will reduce merely if tax rates are moderated. This is only a half-truth.

Of course, more people may pay taxes when they are reasonable than when they are unreasonable. Especially, if not paying them will bring the law down on you. But the real trick to 'voluntary' compliance is not low rates, but transparency in the usage of the taxes collected.

Ask yourself: Why are people more willing to pay 'extortionate' highway tolls and less willing to pay 'reasonable' taxes? Because tolls give you good roads. You can see what you get for what you are paying.

Ask yourself again: Why is it that the same businessmen who use every trick in the book to avoid taxes suddenly start overflowing with the milk of human kindness and voluntarily donate millions for charity?

Again, the answer is because they know where the money is going.

In a country like India, giving more revenues to the government is not necessarily a great idea.

A rupee saved in the hands of private individuals will probably be put to better economic use than a rupee given to the government as tax.

All in all, I think Kelkar should go back to the drawing board and come up with new ideas, better ideas.

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