Vijay L. Kelkar Committee on Fiscal Consolidation

Presented by:- Ankush Singh Bagal

Intoduction Finance minister constituted a 3 member committee under

the chairmanship of the former Finance Secretary and 13th

Finance Commission Chairman Vijay L. Kelkar to outline

a roadmap for fiscal consolidation.

The objective of committee was to give recommendations

on midterm corrections for the fiscal year(2012-13) and

reforms for medium term fiscal consolidation.

Members of the Committee

Vijay L Kelkar - ChairmanIndira Rajaraman - MemberSanjiv Misra - Member

Need for fiscal consolidation Fiscal consolidation is very important because India’s fiscal deficit, the excess

of government expenditure over receipts, is forecasted to expand to 6.1% of

GDP, higher than the budget estimate of 5.1%.  High fiscal deficit can be

problematic for many reasons

investment, growth and employment could all weaken

inflation could increase

monetary policy expansion may be constrained

external sector imbalances could widen

high fiscal deficits might reduce investor confidence in India.

Key Points in report

Report talks about relation between growth rate and employment  according to

the committee’s calculations, growth at around 7% would provide adequate

employment opportunities.

According to report  as a result of reduced corporate profits, weaker industrial

output and decreasing imports , the committee predicts a shortfall in tax revenues

of around Rs 60,000 crore.

Report also highlights subsidies as the greatest fiscal risk for year  2012-13. In

2012-13, the food subsidy is expected to exceed budget estimates by Rs 10,000

crore.

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 year 2012-13, and such

situation could lead the country to a 1991-like crisis.

Therefore, Fiscal consolidation is necessary. Fiscal consolidation = steps to be taken for preventing (or reducing) fiscal

deficit .

So for “fiscal consolidation”, we’ll need to increase the incoming money and

reduce the outgoing money.

How to increase incoming money?

Increase Tax Collection In 2007-08, the tax to GDP ratio was almost 12%

but in 2012-13 this ratio is estimated around 10%..

Therefore Government should take some measures to increase tax collection.

There are two types of taxes: Direct and Indirect. Kelkar committee 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 DTC bill should be comprehensively reviewed.

Data Mining

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.

PAN/UID Card Mandatory 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) It also does not change with address or

place. So if persons got their PAN/UID while they were in college of Delhi but

then shifted to Bangalore, PAN/UID numbers would not change. This helps in

tracking down tax evaders.

Report 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.

Charge interest rate on tax defaulters

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.

Thus, if Government takes above steps then direct tax

collection would increase.

How to increase collection of Indirect Taxes?

The committee recommends reforming Union Excise Duties (UED) and

Service Tax (ST) so that they can be smoothly integrated into upcoming

Goods and Services Tax.

Increase the coverage of service tax

At present, many activities are outside the service tax regime, for example

Department  of Post, renting houses, Funeral services etc.

Committee recommends, this Negative list should be cut-down, shortened. That

means, give exemption to very few activities.

“Negative list”= It is a list prepared by Government. It contains the names of

services, which are exempted from Service tax.

For example:

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

Committee recommends that the Railways should no longer be exempted

from service tax after that date.

Implement Goods and Services Tax (GST)

The committee suggests implementing the nationwide Goods and Services Tax

(GST) recommended by the 13th Finance Commission. This should increase

output, exports and tax revenues.

6% Excise duty on Merit goods only

Excise duty = a type of indirect tax collected by Union Government, on the

goods manufactured or produced in India

Government  of India charges excise duties on various goods

produced in India.

For example

12%  small cars

6% on LED Lamps.

Committee recommends to 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.

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.

Externality = When two party do some business, “externality“ is

experienced by the unrelated third parties that are not involved in that

business.

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.

Report also suggested some more ways to increase incoming money.

Disinvest from PSUs

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 Finance. 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)

Committee recommends, Government  should sell minority stakes in entities

such as , Hindustan Zinc, Balco  etc. This way, it can easily get the required

30k crores.

But report 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.

The Committee recommends that the government should set up a group

to suggest monetizing governments land’s resources .

How to Decrease the Outgoing Money? Reduce Subsidies

Government should reduce the subsidies on diesel, petrol,

kerosene, LPG and Urea etc. in phased manner.

It recommends an immediate increase of Rs 4/ litre on diesel,

Rs 2/litre on kerosene and Rs 50 per LPG cylinder.  This

would decrease the under –recovery burden by Rs 20,000

within 6 months according to the report.

In the longer term, the committee wants to gradually

phase out the per unit subsidy on diesel in two years and

LPG subsidy by 2014-15.

Subsidy must be continued for kerosene as long as it is

affordable.

The committee views the subsidy on diesel as a major

contributor to India’s fiscal deterioration.

Diesel subsidies in rainfall deficient districts should be

provided.

Access to seeds, fertilizer and credit should be

increased.

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

programs that lead to creating new job opportunities.

If Kelkar report is implemented then Diesel price will

increase by around Rs.6/lit and LPG price by Rs 87 per

cylinder.

Change focus of Government schemes

Kelkar suggests that all Government  schemes /

Programmes for the poor should be centered around

Employment Generation, rather than populist schemes

aimed at free electricity, etc.