Shome likely to finetune Kelkar recommendations

With Parthasarathi Shome set to become the adviser to the finance minister, one can expect some finetuning of Vijay Kelkar's recommendations on taxation.

On broad areas of the taxation policy, the Kelkar Task force on the implementation of the Fiscal Responsibility and Budget Management Act, and the advisory group headed by Shome had varying recommendations.

But there are similarities on the approach to export earnings and tax on services. In the case of export earnings, both the committees recommended abolition of income tax benefits under Section 10 A and Section 10 B. On tax on services, both the committees favoured a small negative list.

On the introduction of the value added tax, Kelkar suggested a single rate of 8 per cent VAT, while Shome said a state level VAT could co-exist with central VAT and a two floor VAT rate structure for essential and other commodities, in addition to the zero rate.

The advisory group under Shome was in favour of a maximum marginal rate of 30 per cent in income tax, with no tax at incomes below Rs 50,000.

Broadbasing various slabs and streamlining base erosion were proposed. The KTF recommended no tax for incomes below Rs 100,000 besides continuing the benefits on housing loans, senior citizens and women.

The Shome committee recommended abolishing savings incentives in phases in addition to withdrawal of incentives for housing loans. Concessions under Sections 80D, 80DD, 80DDB and 80E should be given in form of tax credit.

The KTF supported doing away with infrastructure and backward districts-related exemptions available under Section 80IA and 80IB.

Elimination of standard deduction for salaried taxpayers and of deductions in respect of interest on certain securities like the National Saving Certificates, etc were recommended.

All existing investment under schemes like PPF were proposed to be grand-fathered, but in case of new investments in such instruments, deposits and interest accruing on it would be exempted but taxed at time of withdrawal.

On corporate income tax, the KTF recommended two alternative packages, the first suggested that existing tax incentives be grandfathered for existing units but removed for new units, reduction in the general depreciation rate from 25 per cent to 15 per cent and a cut in the corporate tax rate from 35.87 per cent to 30 per cent for domestic companies.

An alternative suggested by KTF envisaged elimination of tax on distribution of dividends while continuing with exemption from income tax of dividends in the hands of recipients. Incentives were to be phased over two years instead of grandfathering them.

The Shome advisory group suggested harmonisation of personal and corporate taxes, which would entail reducing corporate tax to 30 per cent.