The BITE Team: (Clockwise from bottom right) Jairam Ramesh, Secretary, Economic Affairs, AICC, Vijay Kelkar, Chairman, Task Forces On Direct and Indirect Taxes (chief guest), Suresh Tenduklar, Professor, DSE, Siddhartha Roy, Chief Economist, Hindustan Lever, Indira Rajaraman, NABARD Professor, Institute of Economic Growth, Kirit Parikh, Professor, IGIDS, Subir Gokarn, Chief Economist, CRISIL, Bibek Debroy, Director, Rajiv Gandhi Institute of Contemporary Studies

What would make Vijay Kelkar happiest? The obvious answer: If the government decides to implement his two-part report on taxation in its entirety. But if that does not happen-and that's much more than a mere possibility-what does he think are his three most important recommendations? True, it's an unfair question to ask a man who believes that his recommendations can be effective only if they are adopted holistically and not in a piecemeal fashion, yet we asked him that. Kelkar's shortlist: First, his recommendation for the establishment of a Tax Information Network, which will provide an online database of all tax-related information for 500 cities across the country. Second, the restructuring of savings incentives, where he has proposed two options to promote long-term and short-term savings, respectively. And third, the proposal to reduce corporate taxes from 36.75 per cent to 30 per cent for domestic companies.

Kelkar, who was chief guest at the second meeting of the Board of India Today Economists (BITE), said his main task was to arrest the Indian economy's deteriorating fiscal situation, which had clearly become "unsustainable". The combined fiscal deficit of the Centre and the states had touched double digit-the highest in recent times-and the total public debt, including the off-budget and off-balance sheet liabilities, had exceeded 100 per cent of the gross domestic product.

To compound matters, there is no longer a safety net, which many other countries enjoy, because India's nuclear status makes it more difficult to get funds from the International Monetary Fund (IMF) like it did in 1991. The time, therefore, had come to take immediate corrective steps before the economy slid further into a full blown fiscal crisis. The only way to get the economy back on the rails was to take action both on the revenue and the expenditure side. The Kelkar report, however, focused on the revenue aspect since the Geetakrishnan Committee (headed by former Finance Secretary K.P. Geetakrishnan) had already looked into the expenditure issue and submitted 10 reports to the government from 2000 onwards.

"The tax reports provide a powerful counter-cyclical package that promotes consumption, investment and exports and also ensures more efficient use of production facilities'' V. Kelkar: Will his recommendations see the light of the day?

The Kelkar committee's task, therefore, was to prepare a world class tax regime by simplifying the existing tax structure, substantially reforming the tax administration, removing all exemptions to ensure better tax compliance and therefore achieve a better tax/gross domestic product ratio that the country so desperately needs, but without increasing the tax rates. A strategy that has successfully worked in China, Brazil, and Turkey, which had gone through a period of similar fiscal rectitude not only to emerge unscathed and also managing to raise their tax/GDP ratio by 3-4 per cent in five years.

The six economists who make up BITE-Bibek Debroy, Director, Rajiv Gandhi Institute of Contemporary Studies, Siddhartha Roy, Chief Economist, Hindustan Lever, Suresh Tendulkar, Professor, Delhi School of Economics, Indira Rajaraman, NABARD Professor, Institute of Economic Growth, Subir Gokarn, Chief Economist, CRISIL, and Kirit Parikh, Professor, Indira Gandhi Institute of Development Studies-largely gave the thumbs up to the Kelkar recommendation, with individual comments and suggestions.

The Missing Middle

BITE was in agreement with the core thrust of Kelkar's tax reforms, namely on "improving the microeconomics of tax compliance'' through better tax administration since it was the administration that was very much skewed against the tax-paying public. As Kelkar himself says: ''In the economics of tax compliance today, it is rational not to pay taxes.'' For the honest taxpayer, compliance cost (the cost of paying taxes) was nearly 48 per cent ( i.e. a person has to incur a cost of 48 paisa on every rupee paid as taxes, while the non-compliance costs works out to be around 60 per cent). In the event of a raid or search and seizure, a tax evader can pay 60 per cent of the income and get away scot-free.

No wonder then, tax compliance in the country has steadily declined over time and across income groups. The phenomenon of the "missing middle"-the drastic fall in the number of tax paying public in the Rs 1 lakh to Rs 6 lakh income bracket has become acute. "Even 12 to 13 years ago, this group constituted around 25 to 30 per cent of the total tax-paying public.

Mavenspeak There was agreement across the board on the merits of the kelkar recommendations.

Bibek Debroy Director, RGCIS GDP growth*: 6% On the Kelkar report: Some proposals like simplifications of the tax structure and removal of dividend tax will be implemented. Indira Rajaraman NABARD Professor, Institute of Economic Growth GDP growth*: 6% On the Kelkar report: It is unlikely that tax exemptions will be removed and the report implemented in its entirety. Kirit Parikh Professor, IGDIR GDP growth*: 6% to 7% On the Kelkar report: The core issues on both direct and indirect taxes will be accepted and implemented. What is needed is a tax system that will minimize market distortions and stimulate growth Subir Gokarn Chief Economist CRISIL GDP growth*: 6% On the Kelkar report: Politically attractive propositions like raising the exemption limit on personal income tax will be implemented. Siddhartha Roy Chief Economist Hindustan Lever Ltd GDP growth*: 6% On the Kelkar report: Only those recommendations that won't hurt politically will be retained and implemented. Suresh Tndulkar Professor, Delhi School Of Economic GDP growth*: 6% On the Kelkar report: The core contents of the Kelkar committee, both on the direct and indirect taxes, will be implemented.

Today it is down to a single digit." A major objective of the Kelkar recommendations, therefore, is to bring this segment back into the tax net and ensure a quantum jump in tax collection rather than go after the poorer section, who are within the Rs 50,000 to Rs 1 lakh income bracket per year.

Kelkar defends his recommendations to withdraw all exemptions on income tax. "Exemptions at the margins help only the rich and powerful since they can decide on which tax to pay or not,'' says he. And with India fast transforming itself into a modern, complex capitalist economy and integrating itself with the world, it was important to let the financial markets be driven by the underlying risk and reward situation as is the case in most developed countries and not distort it through excessive tax interventions. "The idea is not to play God and distort choices in the market but to let the market forces operate freely.'' Thus, the Kelkar Committee has presented a powerful cyclical package that will promote consumption demand, investment and export demand and promote more efficient levels of productivity by discouraging exemptions at the margins.

Taxing India Inc.

For corporate taxation, Kelkar feels that by reducing the tax rate from the existing 36.75 per cent to 30 per cent for domestic companies, removing all exemptions and the controversial minimum alternate tax (mat), the government will not only be able to bring all companies under the tax net, but would also raise an additional Rs 10,000 crore.

BITE's members have individual opinions about implementing the Kelkar recommendations. Says dse's Tendulkar: "It is most important for the government to accept the Kelkar report as a complete package and not in bits and pieces. It is just not possible to accept some recommendations and reject others." CRISIL's Gokarn emphasises the need for correcting imbalances in the tax system. Example: while industry constitutes only around 23 per cent of the GDP, it pays more than 70 per cent of the total taxes. "There is a need to rectify the distortion, become more hospitable to the industry and stimulate growth in the economy." IGIDR's Parekh was against raising the income tax exemption limit-from Rs 50,000 to Rs 1 lakh-because it was important to create an environment for the common man to pay taxes.

Institute of Economic Growth's Rajaraman was also not in favour of raising the income-tax limit further arguing that the government could not afford to lose Rs 686 crore in revenues, given the poor tax/GDP ratio. She also wanted more government finances for infrastructure projects.

But the moot question still remains. Will the Finance Minister accept Kelkar's recommendations in full or only pick and choose those that are politically expedient in an election year? If that happens, a world-class tax policy report, like many other reform proposals, will again be destined to gather dust in one of the old, dilapidated cupboards of North Block.