Task Forces on Direct and Indirect to the Government in December, 2002.
Taxes These Task Forces have made important
recommendations on toning up tax
2.50 While presenting the first batch of administration to put in place a system that
supplementary demands for grants to is simple, effective and at par, if not better,
Parliament in July, 2002, the Finance Minister than international standards. The main
had proposed setting up of two task forces recommendations on direct taxes relate to
to recommend measures for simplification raising of exemption limit of personal income
and rationalisation of direct and indirect taxes. tax, rationalisation of exemptions, abolition of
Accordingly, two task forces were set up in concessional treatment to long-term capital
September, 2002 under the Chairmanship of gains, abolition of wealth tax, etc. In respect
Dr. Vijay L. Kelkar, Adviser to Minister of of indirect taxes, the main recommendations
Finance and Company Affairs. The setting relate to widening of the tax base, removal of
up of these task forces was an attempt to exemptions, expansion in the coverage of
demystify the process of budget making and service tax, etc. The major
to make it transparent and to facilitate an recommendations of the Task Forces on
informed discussion. Direct and Indirect Taxes are presented in
2.51 As per the terms of reference, the Task Boxes 2.3 and 2.4 respectively.
Force on Direct Taxes was required to submit
a consultation paper to the Government Disinvestment & strategic sale of public
containing its recommendations on sector undertakings
rationalisation and simplification of direct
2.53 Disinvestment of Government equity
taxes, improvement in tax payer services and
began in 1991-92. However, till 1999-2000 it
redesigning procedures for strengthening
was done primarily through the sale of minority
enforcement. The Task Force on Indirect
share holding in small lots. It is only from
Taxes was mandated to make
1999-2000 that emphasis of disinvestment
recommendations on simplification, reduction
changed in favour of strategic sale. The
in the cost of compliance of customs and
primary objective of disinvestment, especially
central excise duties, automation of tax
through the strategic sale route is that with
administration, simplification of statutory
the transfer of management control into
returns, records, procedures for time-bound
private hands, private capital and
disposal of matters and different aspects of
management practices would be used
legal provisions to facilitate tax payers and to
effectively to increase the operational
improve tax compliance.
efficiency of the company. Evidence suggests
2.52 The Task Force on Direct Taxes that there has been an improvement in the
presented its consultation paper to the efficiencies of PSUs after disinvestment.
Government on November 2, 2002. The
discussion paper on indirect taxes was 2.54 In the Budget for 2002-03, receipts
presented on November 25, 2002. These from disinvestment of PSUs are estimated
consultation papers were made public to at Rs.12, 000 crore. During the period April-
facilitate an informed discussion on tax policy. December 2002, a sum of Rs.3,122 crore
There was an overwhelming response from was realised by way of such receipts. In the
trade and industry associations, and from current financial year strategic disinvestment
people from all walks of life. The purpose of by way of sale of Government of India equity
bringing transparency in the formulation of has taken place in 13 PSUs up to December
tax policies was more than served by these 2002. These PSUs are Hindustan Zinc Ltd.,
discussion papers. After taking into account IPCL, 10 hotels under the ITDC and one hotel
the response on the discussion papers and of Hotel Corporation of India. Apart from this,
holding discussions with trade and industry the Government of India received a control
associations and a cross section of people, premium from Maruti Udyog Limited of
the Task Forces submitted their final reports Rs.1,000 crore. The remaining 26 percent
Website : [Link]
Box 2.3 : Major recommendations of the Task Force on direct taxes
Tax Administration
l Expansion of taxpayer services both qualitatively and quantitatively. Easy access to taxpayers through
internet and E-mail and extension of facilities such as Tele-filing and Tele-refunds.
l Extension of PAN to cover all economic agents/citizens.
l Abolition of block assessment of search and seizure cases.
l Outsourcing of data entry work relating to certain activities of the tax administration, so as to clear the back
log.
l Processing of all returns and issue of refunds within four months.
l Introduction of transparency and objectivity in the process of selection of cases.
l Establishment of a Tax Information Network on a build, operate and transfer basis to speed up the
process of modernisation and consequent simplification and rationalisation of the scheme of tax deduction
at source.
l Outsourcing the preparation and dispatch of refunds.
l Abolition of the requirement of obtaining a tax clearance certificate before leaving the country. Restriction
of this requirement to proclaimed offenders.
l Enhance accountability of officers and staff.
l Empowering CBDT with appropriate administrative and financial powers.
Personal income tax
l Increase in exemption limit to Rs.1 lakh for the general categories of taxpayers. A higher exemption limit
of Rs.1.50 lakh for widows and senior citizens.
l Introduction of a two rate personal income tax schedule-20 percent up to an income of Rs.4 lakh and 30
percent for income exceeding Rs.4 lakh. Elimination of surcharge on personal income tax.
l Elimination of standard deduction.
l Incentivise borrowings for housing by providing 2 percent interest subsidy on all loans below Rs.5 lakh.
The second best option is to continue with the tax treatment of mortgage interest for owner occupied
houses but with a reduction in the amount of mortgage interest deductible from the existing level of
Rs.1,50,000 to Rs.50,000 only.
l A tax rental agreement whereby States would authorise the Central Government to impose income tax on
agricultural income and assign the proceeds to States.
l Deduction under Section 80CCC for contribution to pension funds to be increased from Rs.10,000 to
Rs.20,000. The scope of the Section to be enlarged to cover a large number of pension/annuity schemes
within the ceiling of Rs.20,000.
l Elimination of tax incentives under Section 88, 80L and interest income under section 10.
Corporate tax reforms
l Reduction in corporate tax rate to 30 percent for domestic companies. Foreign companies to be taxed
at 35 percent. Exemption from tax on dividends and capital gains from listed equity.
l The general rate of depreciation for plant and machinery to be reduced to 15 percent from the existing
level of 25 percent.
l Elimination of minimum alternate tax.
l Long-term capital gains to be aggregated with other incomes and subjected to taxation at the normal
rates. Exemption to continue if the long-term capital gains are invested in a house or in the bonds of
National Highway Authority of India (NHAI) until completion of the Golden Quadrilateral and the North-South
and East-West corridors.
l Removal of exemption under Section 33AB, 33AC, 33B, 35, 35AC, 35CCA etc.
l Income of mutual funds derived from short-term capital gains and interest to be taxed at a flat rate in the
hands of the mutual funds.
l Merger of tax on expenditure in hotels with service tax.
Others
l Abolition of wealth tax.
Website : [Link]
Box 2.4 : Major recommendations of the Task Force on indirect taxes
Tax Administration
l Customs clearance to be based on trust and to be uniformly applied to all importers and exporters.
A system of self-assessment of bill of entry by the importer to be introduced.
l Inter-agency issues to be resolved by a high level inter-Ministerial Committee.
l Time limit for processing an import or export document.
l Levy of central excise to be progressively based upon value addition up to processing stage.
l Guidelines on determination of cost of production to be issued at the earliest.
l MRP based levy to be expanded.
l CENVAT credit rules to be amended to abolish the distinction between capital goods and inputs.
l All Customs and Central Excise Commissionerates to fully automate their processes by January,
2004.
Customs Tariff
l Multiplicity of levies to be reduced to three, viz., basic customs duty, additional duty of customs and
anti-dumping duties. Removal of SAD to be linked to implementation of State level VAT.
l Zero percent duty on items like life saving drugs and equipments, sovereign imports and imports
by RBI. 10 percent duty on raw materials, inputs and intermediate goods and 20 percent duty on
consumer goods by 2004-05. 5 percent duty on basic raw materials like coal, 8 percent duty for
intermediate goods, 10 percent duty on finished goods other than consumer durables and 20
percent on consumer durables by 2006-07. Duty reduction to the level of 5-10 percent to start only
after the introduction of State level VAT.
l A duty of 8 percent on crude oil and 15 percent on petroleum products from 2003-04. A duty of 5
percent on crude oil and 10 percent on petroleum products from 2004-05.
l A higher duty rate up to 150 percent on specified agricultural products and demerit goods.
l All exemptions to be removed except in the case of life saving goods, goods of security and strategic
interest, goods for relief and charitable purposes and international obligations including contracts.
Central Excise
l All levies to be reviewed and to be replaced by only one levy, i.e., the CENVAT.
l Zero excise duty on life saving drugs and equipments, security items, food items and agricultural
products, 6 percent for processed food products and matches, 14 percent standard rate for all items
not mentioned against other rates, 20 percent on motor vehicles, air-conditioners and aerated water.
Separate rates for tobacco products.
l A uniform rate of 16 percent on all fibres and yarns, by raising duty on cotton yarn from 8 percent
to 14 percent and bringing down duty on polyester filament yarn to 14 percent in four instalments.
l All exemptions to be removed on the textile sector except for fabrics woven handlooms, handloom
fabric certified as khadi, etc.
l Duty exemption in respect of small scale sector to be extended to only small units with turnover of
Rs.50 lakh. Duty exemption limit for larger SSI units to be brought down gradually to Rs.50 lakh.
l Uniformity in all State legislations, procedures and documentation relating to VAT.
l Extension of service tax in a comprehensive manner leaving out only a few services by including
them in a negative list. A separate legislation on service tax to be integrated finally with the Central
Excise Law.
Website : [Link]
shareholding of Government of India in it should be viewed in the context of the need
Modern Food Industries (India) Limited has to develop a consensus around the key
also been disinvested through exercise of a issues. A statement was made by the Minister
put option for Rs.44.1 crore. While the of Disinvestment on December 9, 2002
quantum of receipts so far by way of outlining the consensus that emerged on the
disinvestment of PSUs is less than the target, policy of disinvestment.
Website : [Link]