The Hindu Business Line : Kelkar panel favours fewer, lower tax rates against ad-hoc rates

IF the Dr Vijay Kelkar led task force has its way, consumers might soon be able to take their eyes off the taxation moves made in the Ministry of Finance before taking financial decisions.

"The goal of a rational tax system is to empower households to engage in undistorted decision making, driven by their own needs and preferences and not decisions made in the Ministry of Finance," the report has said on its suggestions on the tax strategy that needs to be adopted by the Government.

Pointing out that the Indian consumer is "remarkably sensitive to apparently small changes in relative prices", the task force has suggested that along with have fewer tax rates attempts should be made to ensure that the rates are kept low.

"High tax rates distort economic decisions and fuel the deployment of resources into tax avoidance and tax evasion. A large number of rates of taxes generate problems of bracket creep, classification disputes and political lobbying," the report has said.

The panel has said that the instead of increasing the tax rates to boost collections, the preferred strategy would be to expand the tax base. "This (widening the base) would involve removing exemptions and broadening the scope of the tax system to bring within its fold economic activities which are currently exempted," it has said.

Strongly favouring a value-added tax (VAT) regime, the task force has said that it was essential to shift to non-distortionary consumption taxes. "The destination-based VAT on all goods and service is the best method of eliminating distortions and taxing consumption," it has said.

It has also proposed to enhance the neutrality of the tax system to the form of organisation. "The choice of organisational structure adopted by decision makers in the economy should be driven by efficiency considerations and not tax considerations."

The panel has also expressed itself against imposing ad-hoc tax rates. "It is always possible to pick sectors with easy enforceability - such as telecom, banking or oil - and impose taxes on them. However, such an approach is not a long-term foundation for a sound tax system," the panel has argued.

It has said that such ad-hoc taxes "induce deeper distortions in the economy, adversely affecting the growth of GDP through misallocation of resources and setting the stage for new kinds of tax avoidance mechanisms."

The panel has favoured voluntary compliance and has said that non-compliance should be made a risky affair for the violators.