New Delhi: Already battling opposition to its reforms measures, the Government has been asked by the Kelkar committee to eliminate various subsidies in phases by hiking prices of LPG, kerosene, diesel and foodgrains in ration shops to deal with the deteriorating fiscal situation.

The Committee headed by former Finance Secretary Vijay Kelkar has also suggested a slew of bold measures to cut the subsidy bill, which did not find favour with the government.

Recommendations contrary to govt’s policy

Government, which had only recently hiked diesel price and capped subsidised LPG cylinders, said the suggestions were contrary to its established policy of protecting the poor.

The final view on the recommendations of the committee, set up by Finance Minister P Chidambaram to suggest fiscal consolidation road map, will be taken by the government after receiving feedback from stake holders.

  • Recommends immediate increase in petroleum prices and deregulation of diesel prices by 2014-15
  • Prices of kerosene and LPG should be revised regularly
  • On fertiliser subsidies, efforts should be to continuously revise urea prices
  • Direct Taxes Code Bill, 2010 should be comprehensively reviewed before it is enacted into law for implementation
  • Effort should be made to expedite the implementation of the Goods and Services Tax
  • 'Do-nothing' approach likely to result in a fiscal deficit of 6.1 percent of GDP in 2012-13
  • Suggests to bring down fiscal deficit to 3.9 pc in FY15
  • About Rs 60,000 crore shortfall likely gross tax revenues
  • Subsidy estimates likely to shoot up by Rs 70,000 crore
  • Current account deficit may touch 4.3 per cent of GDP
  • If no policy interventions are made, disinvestment receipts would stand at around Rs 10,000 crore
  • Suggests to remove the system of levy (subsidised) sugar and the controls on the flow of non-levy sugar
  • Direct transfer of cash subsidies may be more efficient way of reaching the beneficiaries

Observing that Indian economy may be encountering a "perfect storm" on account of various domestic and global problems, the Committee suggested tough measures to bring down fiscal deficit to 3.9 percent of the Gross Domestic Product (GDP) in 2014-15 from 5.2 percent expected in the current financial year.

Its recommendations include selling of surplus PSU land, fast tracking disinvestment and expanding the service tax net to raise revenue.

It suggested phased implementation of the much-touted Food Security Bill to provide cheap foodgrains to families below poverty line (BPL) in view of the current fiscal situation and pitched for hiking urea prices.

Measures must not be anti-people

Reacting to the committee's suggestion of eliminating major subsidies, Arvind Mayaram, Secretary in the Department of Economic Affairs said, "the government is of the view that in a developing country where a significant proportion of the population is poor, a certain level of subsidies is necessary and unavoidable, and measures must be taken to protect the poor and vulnerable sections of the society".

"Indian economy is presently poised on the edge of a fiscal precipice, making corrective measures aimed at speedy fiscal consolidation an imperative necessity," said the Committee, which besides Kelkar included Indira Rajaraman and Sanjeev Mishra.

The Committee has suggested phased elimination of subsidy on diesel and LPG in the next four years and reduction in kerosene subsidy by one-third by 2014-15.

On disinvestment side, the Committee said that in absence of adequate steps the government will be able to raise around Rs 10,000 crore, as against the target of Rs 30,000 crore.

The budget target of Rs 30,000 crore, the panel said, could be met by the government by selling minority stakes in companies like SUUTI, Hindustan Zinc and Balco.

It further said that the funds from the monetisation of surplus government land could be made available to fund infrastructure needs of the country.

On the possibility of monetisation of land, Mayaram said, "it is not something where decision has not been taken. But we are certainly not putting sale of land as part of our fiscal consolidation as of today".

Reforms in other sectors

The Committee also wants the government to pursue reforms in other sector, like infrastructure, finance, taxation and regulation to improve business climate and spur investment.

It cautioned that in absence of these measures, the fiscal deficit of the government could shoot up to 6.1 percent of the GDP in the current financial year. It can be contained to 5.2 percent with the proposed reforms.

The government had on September 13, raised the price of diesel by over Rs 5 per litre and capped the number of subsidised LPG cylinders at 6 per family per year.

He further said the fertiliser and food subsidies are expected to exceed the budget estimates by Rs 10,000 crore each. In the 2012-13 Budget, the fertiliser subsidy was pegged at Rs 60,974 crore and the food subsidy at Rs 75,000 crore.

"We feel that if no steps are taken the subsidy expenditure would go up from budgeted 1.9 percent to 2.6 percent of the re-assessed GDP," it said.

Comprehensive review of DTC Bill

The panel has recommended a comprehensive review of the Direct Taxes Code Bill and bringing in more services in the tax net.

The Kelkar Committee also recommended amendment to the law to make quoting PAN or the UID mandatory in all electronic transactions including bank accounts, fixed deposits with banks, salary payments and immovable property transactions, irrespective of the amount or level of transaction.

Online verification of PAN could be made mandatory for high value transactions to reduce use of black money, it said.

Highlighting that non-issue of refunds is a constant source of grievance for taxpayers, the panel said "all pending refunds should be issued at the earliest. This will also improve liquidity of taxpayers and reduce their dependence on market borrowings at a relatively high interest rate".

Besides, the Income Tax Department should create a national portal to enable taxpayers to file applications seeking rectifications and appeal effect, it said.

Referring to the Direct Taxes Code Bill introduced in the Parliament, it said the proposed legislation which intends to revamp the law relating to direct taxes is likely to result in considerable unacceptable losses on a continuing basis.

"Given the low tax-GDP ratio and the existing fiscal crisis, there is absolutely no fiscal space for such large revenue loss.

Therefore, the Direct Taxes Code Bill, 2010 should be comprehensively reviewed before it is enacted into law for implementation," the Kelkar committee report said.

Standing Committee for Finance has already given its report on the Bill.

On the indirect taxes, it suggested that the negative list of services should be reviewed for "further pruning".

"For example, there is no case for exempting non profit organizations from the Service Tax levy," it argued.

It also pitched for expediting implementation of the Goods and Services Tax (GST) regime. This will enhance output, exports and tax revenues, it said.

The Kelkar report said that even though the roll-out of GST from April 1, 2013 does not appear to be feasible, the passage of the Constitutional Amendment Bill in the Winter Session would send out very strong signal about the government's serious intent to move forward on this issue.

It further suggested that Central Board of Excise and Customs (CBEC), responsible for indirect tax collection, should put in place a robust information system to increase the deterrence level and the cost of evasion.

CBEC should also develop a similar model for comprehensive cross verification of claims for input tax credit, it said adding this should be implemented immediately and need to wait till the introduction of the GST.

The Union Excise Duties (UED) and Service Tax (ST) must be reformed so as to be in a state of preparedness for smooth integration of these levies into the GST, it said.

"The standard rate of 12 percent should be progressively reduced to align with the GST rate of 8 percent proposed for the Central GST," the report said.

The panel has also suggested to the Income Tax Department to establish a data-warehousing and data-mining infrastructure within the tax administration and build capacity for undertaking data mining and taxpayer profiling.

It further suggested to amend the provisions of all tax laws to charge interest at rates which reflects the market rate of interest to the defaulters and a penalty for such default.

The Income Tax Department, it suggested, should set-up a separate Directorate of Risk Management for designing a robust risk management system which will improve the efficiency of the tax administration and enhance transparency.

The panel is also for a 360 degree profile of all taxpaying individuals and institutions to help decrease tax evasion and tax fraud.

This profile should also draw information from the AIR, TDS and other databases of the department, it said.

Talking about disinvestment, the Kelkar panel proposed a 'Call Option Model' under which the government may offer for sale, simultaneously, multiple securities over a period of time until the divestment targets are achieved.

It said the salient features of this proposal include an opportunity to sell regularly as against a large stake sale on a single day.

"This is to address the issue of wide fluctuation in market prices arising out of additional flow of liquidity in to the market and to avoid market price volatility, if any," the report added.


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