- Observations of Vijay Kelkar Committee
- How to increase collection of Direct Taxes?
- How to increase collection of Indirect Taxes?
- Disinvest from PSUs
- Dividend from PSUs
- How to Decrease Outgoing Money?
- Mock questions for CSE, RBI Grade “B” etc.
Let us recap what we saw in previous episode starring Vijay Kelkar:
- Fiscal deficit =When outgoing money is more than incoming money, a pothole is created. This pothole is known as Fiscal deficit and it is not good for the economy.
- Fiscal consolidation = steps to be taken for preventing (or reducing) fiscal deficit pothole.
Now the moving on:
- High fiscal deficits tend to
- heighten inflation.
- reduce room for monetary policy stimulus (=steps taken by RBI to direct economy)
- dampen private investment, growth and employment.
- millions of young, both skilled and unskilled, enter the labour force each year, hence inflation and unemployment can be politically destabilizing for the Government.
- If Government takes no step, then with a “do-nothing” approach, the fiscal deficit will be more than 6 per cent of GDP in the current year 2012-13, and such situation could lead the country to a 1991-like crisis.
- Therefore, Fiscal consolidation is necessary.
So obviously, for “fiscal consolidation”, we’ll need to increase the incoming money and reduce the outgoing money. Now, let us check some of the important recommendations of this Kelkar Committee.
- In 2007-08, the tax to GDP ratio was almost 12%
- (but) in 2012-13 this ratio is estimated around 10%.
- It means tax collection has fallen down.
- Recall that fiscal deficit = Government’s incoming money is less than its outgoing money.
- Thefore Government should take some measures to increase tax collection.
There are two types of taxes: Direct and Indirect. Kelkar has given recommendations to increase the collection of both Direct and indirect taxes, in following manner.
How to increase collection of Direct Taxes?
Review DTC bill
- If Direct Taxes Code Bill, 2010 is implemented in its present form then there will be considerable tax losses to the Income Tax department.
- Hence it (DTC bill) should be comprehensively reviewed.
- Since 2004, the Income Tax Department has been electronically obtaining a large volume of information from third-parties through the Tax Information Network (TIN).
- This is done to check tax evasion and black money.
- (but) there is a growing perception that the Income Tax Department is unable to harness this large volume of information, because it lacks data mining skills.
- (Therefore) Taxpayers have found new methods and avenues for parking their undisclosed income to escape detection by Income Tax dept.
- That’s why Income tax department should provide training in data-mining for all directly recruited inspectors and Assistant Commissioners, with the help of Big IT companies.
- What is PAN, why is It used- all discussed in earlier articles. But still here is the brief recap:
- PAN is an all India, unique ten-digit alphanumeric number.
- PAN card is issued by the Income Tax Department. It does not change with changes in address or place.
- UID (Aadhar) is also similar- a unique 12 digit number, issued by Unique Identification Authority of India (UIDAI) to all the residents of India. Please note: there is difference between “resident” and “citizen”. Some people oppose Aadhar on this ground. (That illegal Bangladesis might also get it, if they’ve the proof of residence).
- Please check this chart uploaded on official UID site. Extremely important for MCQs.
- It also doesnot change with address or place. So if you got your PAN/UID while you were in college of Delhi but then shifted to Banglore, your PAN/UID numbers wouldnot change. This helps in tracking down tax evaders.
- Kelkar says amend the laws so that Irrespective of amount of money transected, PAN / UID number must be quoted in bank accounts, fixed deposits with banks, all salary payments and sale of immoveable property.
- This will also help detecting tax frauds and reduce black money.
- Income Tax dept should create a 360 degree orkut profile of all taxpayers.
- This will help decreasing tax evasion and tax fraud.
- Online verification of PAN could be made mandatory for all high value transactions, in order to reduce black money transactions.
Thus, if Government takes above steps then direct tax collection would increase.
- If a company or individual doesn’t pay his taxes on time, then Government should charge 22-24% interest rate on his pending tax payments.
Now second part:
- Kelkar says Mohan should reform Union Excise Duties (UED) and Service Tax (ST) so that they can be smoothly intergrated into upcoming Goods and Services Tax.
- At present, many activities are outside the service tax regime, for example Department of Post, renting houses, Funeral services etc.etc.etc.
- “Negative list”= It is a list prepared by Government. It contains the names of services, which are exempted from Service tax. You can download the entire list from finance ministry website.
- Kelkar says, this Negative list should be “pruned” (=trimmed, cut-down, shortened, condensed). That means, give exemption to very few activities.
- Non-profit organizations should pay Service Tax.
- Government had given exemption to the Railways from service tax payment for transportation of goods and passengers (of higher class) upto 30.09.2012
- Kelkar says, the Railways should no longer be exempted from service tax after that date.
- Kelkar agrees that it is difficult to implement GST from from 1st April, 2013 (because many states are opposed to it)
- But Government should atleast try to pass the Constitutional Amendment relating to introduction of GST, in the Winter Session of the Parliament.
- This would send out very strong signal to trade and industry about Government’s serious intent to move forward on this issue.
- Once the GST is implemented, it will automatically increase the industrial output, exports and (thus) the tax revenues.
- Excise duty = a type of indirect tax.
- Excise duty is collected by Union Government, on the goods manufactured or produced in India.
- Excise duty = charged on goods produced (or manufactured) in india
- Customs duty= charged on goods imported into India as well as on goods exported from India.
- Please note: Excise on alcoholic liquors, opium and narcotics falls under the domain of State Government. Why? Because Seventh Schedule of the Constitution says so.
Anyways back to business. We were talking about Kelkar’s recommendations on Excise duties.
Government of India charges excise duties on various goods produced in India.
- 12% small cars
- 6% on Iodine and LED Lamps.
Kelkar says review the list of goods under “6%” excise duty. Only Merit Goods should have Union Excise Duty of 6%. And for the other items, collect 8% excise duty.
What are merit goods?
- Merit goods are products, such as education, library, museum, vaccination which consumers may undervalue but which the government believes are ‘good’ for consumers as they exhibit positive externalities.
- ok now what is Positive externalities? I think we discussed that in earlier articles, but again
- Externality = When two party do some business, “externality“ is experienced by the unrelated third parties that are not involved in that business.
- I take admission in some pharmacy college. (ME and college are buyer and seller of education). But the college is bogus and doesn’t teach anything meaningful. Then third party (Pharma industry) also suffers negatively, because the drug-company that gives me job in future will run less efficiently because I’m not very skilled pharmacist! (this is an example of Negative Externality)
- IF all kids are given policy vaccine by Government, then then India’s future workforce will be healthier and fitter =third party (Industries) will also benefit.
- Kelkar observed that under the Kerala VAT regime, the dealer must electronically provide invoice-wise details of all sales to, and purchases from, registered dealers.
- Central Board of Excise and Customs (CBEC) should also develop a similar computerized system for comprehensive cross-verifications.
- This will help in detecting the tax-evaders.
These are (not all but) main recommendations of Kelkar on how to increase collection of direct and indirect taxes = incoming money will increase.
He also suggested some more ways to increase incoming money.
- First of all, what is PSU? Answer Click ME
- You already know about Debt vs Equity, Shares vs Bonds If not click me
- Disinvestment (in crude terms) = when Government sells its shares from a PSU.
- The Budget 2012 wants Government to collect Rs.30,000 crores via Disinvestment. (This money would go in National Investment Fund under Ministry of Finace. And later on this money would be used to finance bogus Government schemes and to revise other PSUs, if they’re capable of making profits)
- Kelkar says, Government should sell minority stakes in entities such as SUUTI , Hindustan Zinc and Balco etc. This way, it can easily get the required 30k crores.
- But Kelkar has different views about what to do with this money! He says, The money thus collected, through the disinvestment process should be deployed in infrastructure= growth and employment.
- Using this money, Government could move into the sectors where private players would be hesitant to play a role. These include areas such as garbage clearing, public health, cleaning of rivers, recharging of groundwater, urban mobility and so on.
- You already know about shares and dividend. If not, then go through the same debt vs equity article.
Ok let us review what we learned so far
- Fiscal deficit = outgoing money > incoming money.
- Fiscal consolidation = steps aimed at reducing fiscal deficit.
- To reduce fiscal deficit, we need to increase incoming money and decrease outgoing money.
- We saw how to increase the incoming money (direct+indirect tax, PSU dividend and sell land)
Now let us move to the second part:
Kelkar has plain and simple solution for this.
- Kelkar says increase the prices of diesel, petrol, keroscene, LPG and Urea etc. (Actually he says Government should reduce the subsidies on each of them, in phased manner = price will increase automatically!)
- Kelkar also clarifies that he doesn’t want complete elimination of subsidies. He says we shouldn’t eliminate subsidies. Food subsidy is defensible. For undernourished children or lactating mothers food subsidy is not only defensible, it is ethically right and morally correct
- Subsidy must be continued for kerosene as long as it is affordable (for the government)
- But the subsidies should be reduced as and where possible.
- For example, LPG subsidies do not go to our people who fall in the low income bracket, therefore LPG subsidies should be removed.
- With a drastic cut in subsidies, a bigger part of the resultant savings should be channelized towards programmes that lead to creating new job opportunities.
- Kelkar agrees that Yes, reduction in (petrol, diesel, kerosene, urea) subsidies could lead to some short-term pain (=inflation ) but the government should spend more on employment generation, which would lead to higher growth and benefit everyone.
- If Kelkar report is implemented then Diesel price will increase by around Rs.6/lit and LPG price by Rs 87 per cylinder.
Kelkar suggess that all Government schemes/Programmes for the poor should be centred around employment generation.(rather than populist schemes aimed at free electricity, TV Fridge etc.)
These are the major recommendations of Kelkar Committee. This is what “Kelkar said”
Now let us check what Government said on his report?
Chindu: I’m going to hold consolations with various stockholders and then decide the future course of action (about whether should we implement his report or throw it in dustbin). And In a developing country where a significant proportion of the population is poor, a certain level of subsidies is necessary.
Which of the following, is/are not recommend by Kelkar Committee on fiscal consolidation
- Government should sell unused land owned by various ministries, if it is not generating any Revenue.
- Government should increase the subsidies on Urea.
- Government should increase the excise duty on merit goods.
- Government should exempt railways and non-profit organizations from service tax.
- Government should not implement Direct Tax Code in its present form.
- Government should not implement GST in its present form.
Which of the following statements are correct?
- Fiscal deficit stimulates the private investment, growth and employment.
- All Excise duties fall under the domain of Union Government.
- Customs duty is charged on imported items only.
- Funeral services are exempted from service tax.
- Property tax is an example of Direct tax.
- Service Tax is collected by Income Tax Department.
- PAN is a 12 digit alphanumeric code.
- Only a person above 18 years, can get PAN card.
- Only an Indian Citizen can get PAN card.
- “Aadhar” is issued by Ministry of Home Affairs.
- A person below the age of 18 years, is not eligible for “Aadhar”.
- Only a Citizen of India can get Aadhar Card.
Answer following in 200 words
- What are the major recommendations of Kelkar Committee on fiscal consolidation?
- Salient features of DTC Bill.
- Salient features of proposed Goods and Services Tax.
- What is fiscal consolidation?
- Why is it necessary to have low fiscal deficit?
- The presidential debate between Obama and Mitt Romney revolved around healthcare cuts, tax cuts and fiscal deficits. How are they related with each other?