The Hindu Business Line : Shouldn't reforms be in better form?

SINCE Independence, a number of tax reforms have been initiated. These include: the Direct Taxes Enquiry Committee (Indrajeet Singh Committee); THE Tyagi Committee; the Law Commission's examination of the 1922 I-T Act as amended by the 1939 Amendment Act with a view to enact a new I-T law; Prof Kaldor's Report; the Wanchoo Committee; the Choksi Committee; A.L. Jha's exercise on tax reforms for the Administrative Reforms Commission; the Boothalingam report; the Chelliah Committee's reports on the feasibility of imposing an expenditure tax — April 1987; the Report of Tax Reforms Committee headed by Dr Raja Chelliah to, inter alia, to rationalise and simplify the tax law (1992); the Tax Expert Group's report on simplification of tax laws (February 1997) — appointed by Mr P. Chidambaram in August 1996; the Advisory Group appointed by the Planning Commission under Shome for giving recommendations concerning tax policy and tax administration for the Tenth Plan — July 2000 (Report given in May 2001); and the Kelkar Task Force-I (2002) report.

The latest is the second report of the Kelkar Task Force, constituted to look into the implementation of the Fiscal Responsibility and Management Act, 2003. Its suggestions in the realm of income-tax are as follows:

Personal income-tax: The Task Force has been guided by the need to i) remove exemptions; ii) rationalise incentives for savings; and iii) broad base the tax brackets. Keeping these in view, the following suggestions have been made:

Withdraw exemptions, including those available under Sections 10A, 10B, 801A and 801B of the I-T Act. However, exemptions relating to housing loans and those available to senior citizens and women are to continue. (The exemptions described are open to all categories of taxpayers, and not merely for personal taxation.)

Remove standard deduction for salaried employees.

Rationalise savings incentives into a single EET system, where contributions and accumulations are tax exempt but withdrawals are taxed as ordinary income. Savings of up to Rs 1,00,000 a year would be eligible for deduction. Consequently, tax benefits such as those under Section 80L would go (`E' in the EET denotes an exemption or relief and `T' the point at which tax becomes payable).

Redefine speculative transaction.

Corporate tax: Package-I: a) all existing tax incentives to be `grandfathered' for existing units, but re-moved for new units; b) a reduction in the general depreciation rate from 25 to 15 per cent; c) a reduction in the corporate tax rate from 35.875 per cent to 30 per cent for domestic companies.

Package-II: The second package differs from the first in two major respects. It proposes to eliminate the tax on distribution of dividends, while preserving exemption from income-tax of dividends in the hands of the recipients. It also proposes to phase out incentives over a period of two years instead of `grandfathering' them.

Recommendations examined

The approach to tax reform, in general, has been ad hoc and the changes, piecemeal. With the tax law being long-winding and complex, no attempt has been made to take a consolidated view of the Act, taking into account issues that affect taxpayers, the tax administration, tax counsels, economic development, and so on.

Expert bodies constituted to reform the tax law have not been given adequate time to give in their recommendations. For instance, the former Finance Minister, Mr Jaswant Singh, showed much haste in getting the Kelkar Tak Force reports. And Mr P. Chidambaram, during his earlier tenure as Finance Minister, appointed an expert body for tax reform in August 1996 and asked to submit its report by December 31, 1996, that is, in less than five months; the date was later extended to February 28, 1997.

The group submitted a lacklustre report, and a draft of the new I-T Act was submitted on July 11, 1997. The group could not give detailed or convincing reasons for its recommendations.

The Kelkar Task Force submitted its second report within five months. Its terms of reference did not require making recommendations for I-T reforms, but the same have been made as a part of the exercise for drawing up long-term fiscal policies to achieve the FRBM objective. Obviously, the panel could not find time to study and make recommendations for overall restructuring of the I-T law, which has become long overdue.

The key aspects

The important aspects that need consideration in the context of tax reform can be summed up thus:

The basic requirement for a successful tax reforms programme is to decide what is expected from the tax system, say, in the next five years, and formulate a long-term fiscal policy.

In spite of more than nearly 14 studies done in the past 50 years, there have been no major tax reforms, implying a thorough re-examination of the legal and procedural provisions, including some of the basic assumptions of the system.

Ad hoc legislative changes cannot be said to be the product of serious planning; these are made only to address contingencies.

Changes in law consequent to courts' decisions are but sporadic and are made mainly to address emerging situations without looking at possible impact on revenue or effects on other tax provisions/payers.

While making changes to tax laws, practically no attention is paid to administrative reforms. The success of tax reform depends on the motivation, enthusiasm and ability of the tax administration.

Neither while introducing a provision nor after its withdrawal are empirical studies carried out. For example, there is no data with regard to tax revenues foregone consequent to exemptions, concessions and deductions or to show that the loss suffered has been compensated for by achieving the cherished objectives.

Changes relating to basic exemption and standard deduction limits in the case of salaried employees have been based more on gut feeling rather than studies or data.

Suggestions

Tax committees with truncated terms of reference and a limited timeframe to submit their recommendations have failed to give the desired boost to tax reforms. Hence, if concrete results are to be achieved, a tax reforms committee with some permanent and some part-time members may be constituted with adequate secretarial assistance to undertake the task of giving recommendations for comprehensive tax reforms and for re-writing the direct tax laws.

As many legal issues in the implementation of direct tax laws are involved, the commission may be preferably headed by a sitting or retired judge of the Supreme Court (as in the case of Wanchoo Committee), with members from various other disciplines. The commission may be given a minimum period of one year to complete its assignment. Thus, implementing the recommendations of the Kelkar Task Force in its present form may not really reform the I-T law.

(The author is a former chairman of CBDT.)