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Saturday, Dec 28, 2002

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Kelkar for just two I-T slabs

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THE tax burden on personal income-tax payers is set to ease irrespective of whether they are at the bottom of the tax slab or are reasonably well-off individuals.

If the Kelkar Committee's recommendations are accepted by the Centre, they will have to reckon with only two basic rates - - 20 and 30 per cent - - with the first slab commencing only at Rs 1 lakh (against Rs 50,000 now) and the second beginning from Rs 4 lakh (against Rs 1.5 lakh now).

The final report on direct taxes of the committee headed by Dr Vijay Kelkar could also well set the capital markets on fire. For, it recommends a long-standing demand of corporates to abolish tax on dividend distribution and long-term capital gains on listed stocks, besides removal of the Minimum Alternate Tax (MAT).

Further, dividends also need not be taxed at the hands of the shareholders or unit holders, the committee has said.

At the same time, the committee has proposed a radical simplification and reform of the direct tax administration, including removal of tax exemption schemes. The committee has recommended the knocking-off of almost all the tax rebate schemes under Section 88 and tax deductions on interest income under 80 L.

If the Government accepts the Kelkar Committee's recommendations, tax payers can no longer obtain an exemption on interest income received from bonds, securities, debentures under Sec.10. The only concession the committee has provided is for continuation of deductions for contributions to pension funds, whether it is run by the LIC or other private players. The ceiling of the deductions has been raised from Rs 10,000 to Rs 20,000.

Where the committee has diluted its stance compared to the consultation paper is on housing. After recommending the elimination of deduction of mortgage interest (currently available up to Rs 1.5 lakh), the committee has now softened its stand. It has offered two options to the Government. The first best policy option as it calls is to incentivise borrowings for housing by providing a two per cent interest subsidy to be provided by the National Housing Bank on all home loans below Rs 5 lakh. The other option would be to reduce the amount of mortgage interest deductible for taxable interest purposes from Rs 1.5 lakh now to Rs 50,000 only.

The substantial giveaways on the personal income-tax side aggregating Rs 12,228 crore estimated by the committee is sought to be neutralised by the gains of Rs 10,762 crore projected to be netted through corporate taxes and also from additional tax receipts of Rs 1,500 crore from mutual funds.

The committee also appears to have trodden the middle path on corporate taxation. Instead of retaining its earlier recommendation of aligning the depreciation rates of income-tax to the rates under the Companies Act, the committee has suggested that the general rate of depreciation for plant and machinery should be reduced to 15 per cent from the existing level of 25 per cent.

Rates of depreciation for other blocks of assets must be reviewed on the same lines as in the case of plant and machinery. Consequently, the depreciation amount charged for tax purposes will be similar to those charged under the Companies Act.


Personal Income-Tax

  • Exemption limit up from Rs 50,000 to Rs 1 lakh for individuals and HUFs; exemption limit for senior citizens and widows at Rs 1.5 lakh.

  • Income between Rs 1 lakh and Rs 4 lakh to be taxed at 20 per cent; incomes above Rs 4 lakh at 30 per cent.

  • Dividends received from Indian companies fully exempt.

  • Long-term capital gains on listed equity fully exempt.

  • Standard deduction to go for salaried taxpayers; however, exemption for conveyance allowance subject to a ceiling of Rs 9,600 will continue.

  • Section 88 tax rebate for savings to go; no rebate under Section 88B for senior citizens.

  • Section 80L benefit for interest income and dividends to go.

  • No exemption under Section 10 for interest income from bonds, securities, debentures and so on.

  • Deduction towards housing loan interest to be reduced to Rs 50,000.

    Corporate Tax

  • Corporate tax rate cut from the existing 36.75 per cent to 30 per cent for domestic companies; to 35 per cent for foreign companies.

  • No tax on distribution of dividends by a company.

  • Minimum Alternate Tax under Section 115JB to go.

  • Business loss to be allowed to be carried forward indefinitely.

  • Depreciation rates to be reduced to 15 per cent for general plant and machinery.

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    Kelkar for just two I-T slabs

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