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Kelkar's mistakes

T N Ninan

The last few weeks have seen the Vijay Kelkar task force's draft report damned in most fora. Criticism has come from virtually all quarters, and we now have the usual situation of the potential beneficiaries of change keeping quiet while those who might end up paying more tax scream blue murder.

Kelkar has argued that his report will have to be accepted or rejected in toto, since its logic falls if you cherry-pick. Nicholas Kaldor tried the same tack in the 1950s, and the government did then what it is likely to do now: ignore the "love me, love my dog" pleas, take what it likes and dump what it does not.

If the end-product is neither fish nor fowl, then that's too bad... In any case, Dr Kelkar himself is now getting set to modify his report and put together the final version. What should he do?

The first and most basic mistake that Kelkar has made is to ignore the lesson that he kept in mind when drafting the plan for ending price controls on petroleum products.

Then, he kept the time-table for change so extended that no one felt immediately threatened, and as a result there was no sense of shock in the system. He gave everyone five long years to get ready for the new reality, and the ploy worked.

Despite having that experience behind him, Kelkar has now gone and recommended drastic changes in the country's tax regime, and said that all these changes should come into effect four months from now.

Putting aside for a moment the wisdom of the proposals, the fact is that the changes that he has proposed will upset the apple-carts of many companies, and naturally they are lobbying as hard as they can to have the report scuttled.

Indeed, once more companies wake to what is proposed, then the entire corporate sector could be on the warpath, because the result of the Kelkar proposals will be to raise the average tax level from 23 per cent of corporate profits to 30 per cent. In other words, he has asked for a 30 per cent increase in the tax that companies pay.

Individual companies may be hit even harder, if they are in the group that currently benefits from the tax exemptions that are now proposed to be withdrawn. The recommendations on how to calculate depreciation or treat interest on loans or remove exemptions (to take just three examples) can have pretty drastic consequences for many.

The situation for individuals may not be quite so dramatic, if you take individual taxpayers as a whole, but specific situations will differ and it is always the losers who will be howling.

So, if Dr Kelkar wants to give his proposals a fighting chance of survival, he will have to spread out his time-table and suggest (as Raja Chelliah's tax reforms committee did a decade ago) that the changes should be brought about over three years.

He has also ignored the political message that his proposals convey, and that is another liability. But of all the hoary chestnuts that the Kelkar task force has pulled out, the most questionable is the business of taxing agricultural income.

The fact is that 66 per cent of India's workforce is engaged in agriculture and earns 25 per cent of GDP. The ratio of the average agricultural income (25/66) to the average non-agricultural income (75 per cent of GDP for 33 per cent of the population) is therefore roughly one-sixth.

And if you were to provide for the same tax exemption ceiling for agricultural income (one lakh rupees), then very very few farmers will qualify for taxation.

Throw in the complications of assessing income minus farming expenditure and the fact that our mostly corrupt tax officers will be let loose on unsuspecting farmers, it becomes obvious pretty quickly that it is best to leave things well alone.

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