Indian Government Set To Reject Finance Ministry Tax Reforms

by Lorys Charalambous, Tax-News.com, Cyprus

09 January 2003

The Indian Finance Minister, Jaswant Singh, commissioned his adviser, Vijay Kelkar, to compile reports on the future course of Indian tax reform, and last Friday the two reports, one on direct taxation and one on indirect taxation, were published, to an initial chorus of disapproval from the various vested interests which felt threatened by the changes proposed, even though the final reports were more modest in their goals than had been expected at one time.

The deduction for mortage interest in respect of loans for a self-occupied house is proposed to be reduced to Rs 50,000 from the current Rs 150,000 rather than being totally withdrawn as envisaged in the earlier consultation paper.

Kelkar's second concession is for senior citizens and widows. The task force proposes increasing the tax exemption limit from the present Rs 50,000 to Rs 100,000 for all individual tax-payers; for senior citizen and widows, the exemption limit will be Rs 150,000.

Instead of the proposed withdrawal of all tax exemptions on the various savings instruments including provident fund and life insurance, the report argues for a doubling of the deduction limit to Rs 20,000, aimed at encouraging investment of up to that amount in annuity-oriented pension schemes. A maximum tax rebate of Rs 4,000 will be available to investors under this section.

"In the task force, we have applied a litmus test to all our proposals: Will they hit the vulnerable section. We have included a proposal if the answer is negative", Kelkar said addressing a news conference.

The task force has also backed away from a proposal to tax the agricultural income of non-agriculturists, suggesting that its implementation should be delegated to state government (and nobody much thinks they would do anything about it).

The task force claims that its direct tax reform proposals will reduce the burden on all categories of individual tax-payers by a total of nearly Rs 8 billion, with an equivalent amount being raised by additional corporate taxes.

On Wednesday, a meeting of the ruling BJP party's committee on the Kelkar recommendations, headed by general secretary Rajnath Singh, discussed the report for nearly three hours, apparently rejecting or qualifying most of the recommendations on direct taxation. The committee will eventually be reporting to finance minister Jaswant Singh, who will incorporating its suggestions in the coming general budget for 2003-04.

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