Indian Direct Tax Reforms Unlikely To Be Accepted In Full, Experts Warn

by Lorys Charalambous, Tax-News.com, Cyprus

08 November 2002

Following the release this week of the Kelkar tax reform proposals, Indian government officials have suggested that the package is unlikely to pass in anything like its current form.

The special commission - headed by advisor to the Finance Minister Vijay Kelkar - and charged with finding ways to simplify the country's tax system, suggested an increase in the personal exemption limit which would take the majority of ordinary Indian citizens out of the tax net, but also announced plans to remove many of the loopholes and exemptions which allow businesses to evade taxes. The possibility of taxing agriculture income was also raised.

However, speaking to the Indian Economic Times on Thursday, Finance Ministry officials and economic experts alike pointed out the flaws in the tax reform package, and suggested that it will need to be watered down substantially before it will receive government approval.

Citing an unnamed PricewaterhouseCoopers analyst, the newspaper warned that: 'From the corporate sector's point of view, one-stroke withdrawal of exemptions would affect investment in large projects. Project cost calculations will go haywire...[and] increases in project costs would result in a higher burden on other taxpayers and the public at large.'

With reference to the proposed lifting of the personal exemption ceiling, the Economic Times observed that: 'As the tax-GDP ratio has fallen below 9%, the government can ill afford to let a large number of people out of the tax net.'

The general consensus appears to be, then, that the reform proposals, although welcomed by many, will need to be watered down and modified substantially before they are passed. However, according to reports, Mr Kelkar has recently stressed that the recommendations must be accepted as a package, as changes would render them ineffective.

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