The Hindu Business Line : Exemptions must go for taxes to be cut

THE lowering of marginal tax rates for individuals proposed by the Kelkar panel on Direct Taxes could blow a hole in the exchequer's pocket if it were a stand-alone exercise and not accompanied by a removal of exemptions.

According to internal estimates, the revenue loss on account of lowering of marginal personal income-tax rates works out to around Rs 13,000 crore.

However, if the exemptions were to go, the losses would be fully offset, making it a revenue neutral exercise.

The revenue gain is estimated to be Rs 9,500 crore on account of scrapping of standard deduction and Rs 4,500 crore through the abolition of tax rebates under Section 88.

The reforms in corporate taxes proposed by the panel will translate into an increase in the effective rate from 19 per cent to 30 per cent (which is the recommended statutory tax rate).

In fact, one of the significant recommendations made by the panel is to re-design corporate profit tax so as to align taxable income with book profits. With such alignment, corporate profits would bear the full burden of corporate tax.

It would be possible to simplify personal income taxation by fully exempting taxation of dividends at the hands of the shareholder, the committee has held.

While the abolition of dividend tax would result in a revenue loss of around Rs 2,500 crore, the elimination of MAT is estimated to cost another Rs 2,000 crore.

The estimated revenue loss from the proposed abolition of MAT will be offset, to a large extent, through the revenue gains from lower depreciation rates, according to officials.

The task force has recommended removing the distinction between depreciation provisions under the Income-Tax Act and those under the Companies Act.

Accordingly, the depreciation allowance under Section 32 of the I-T Act will be restricted to the allowance charged in the profit and loss account in accordance with the provisions of the Companies Act. The removal of exemptions — 100 per cent tax deduction available on income earned by units operating in special economic zones under 10 A and 10 B of the Income-Tax Act and tax holiday for infrastructure service providers under Section 80 IA and 80 IB — will translate into a revenue gain of close to Rs 3,000 crore.

The Government does not appear to be in favour of lifting all the exemptions at one go, considering that it has given assurances in several sectors. Besides, the issue of FDI inflows are also involved, reckon senior Finance Ministry officials.

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