The Hindu Business Line : Kelkar panel aims to remove tax-induced distortions

THE fiscal reform measures proposed by the Kelkar Task Force focus on achieving the twin aims of reducing the cost of compliance and removing tax-induced distortions, thereby promising to widen the tax base and curb evasion.

Targeting a significantly higher GDP growth rate up to 2007-08, the Task Force has said that the implementation of the tax reforms suggested for the industrial sector would bolster manufacturing and promote employment-intensive growth.

Providing details on the impact of the proposals, the panel said that the proposed EET (exempt, exempt and taxable) system is expected to lead to a considerable expansion of professional fund management.

The report also proposes to modernise the tax treatment of derivatives transactions, which has been a major hindrance for the growth of risk management in the country.

The Task Force has addressed the long-standing distortion in terms of differential treatment of manufacturing and services by proposing the levy of a common goods and service tax (GST).

According to the report, the proposals, once implemented, would result in private investments going up owing to improvements in tax policy and improved provision of public goods.

By proposing a substantial hike in resource flow to states, the Task Force has projected that there should be higher investments in the crucial areas of health and education since bulk of the expenditure on these sectors is incurred by State Governments.

The report has projected that implementation of the reform measures would enable higher allocation for Plan expenditure to the tune of Rs 20,000 crore by 2008-09, which can be then be allocated to the two key sectors.

In the case of manufacturing, the report promises an effective reduction of the tax burden on manufacturing through a reduction in the Cenvat rate from 16 per cent to 12 per cent, and on account of tax credits on the full range of services consumed by them.

Manufacturers, according to the report, would also benefit from the full refund of the GST embedded in their exports.

In the case of exports, the report promises to bring India on par with countries like China in terms of the indirect tax framework, with a low Customs duty regime, a nationwide GST and full refund of the GST on all exports.

"The introduction of this system in China in 1994 presaged the great boom in manufacturing exports from China, and will help do similarly in India," the report said.

It also said that agro-related and manufacturing exports would get a boost since the existing biases against export-oriented small and medium enterprises have been reversed in the reform initiatives suggested by the panel.

The reform measures would also result in State finances receiving a boost through higher resource transfers from the Centre, ability to tax services and through the proposed imposition of State VAT on imports, the report said.