Why Kelkar's tax plan has angered middle-class India
November 20, 2002
Why has Vijay Kelkar's report on direct tax reform provoked such an angry reaction from middle class India?
Dr Kelkar's report contains a slew of wide-ranging prescriptions for reforming the tax system, but it is the single suggestion that government should lower tax rates and scrap all existing tax rebates and savings incentives, that has outraged the middle class.
He suggests that hefty exemptions granted on housing finance in recent years should be phased out over a three-year period.
To most middle class Indians (many of them living in joint families that are crammed in tiny apartments), this is the best time ever to realise a lifelong dream of owning a house or an apartment of their own.
That is because tax exemptions on housing loans are at their highest ever in order to encourage construction activity (because of its multiplier effect of creating a demand for cement, steel, et cetera).
Similarly, interest rates are at their lowest in decades and continue to fall; real estate prices have remained stagnant for over seven years, and to top it all, banks and institutions are jostling with each other to offer housing finance on easy terms.
Several newspapers have published different sets of calculations, which indicate that the higher income earners will see a substantial increase in taxes under the Kelkar plan.
But the intense opposition to Kelkar's suggestions is not even based on actual numbers - it is more an issue of sentiment and perception.
First, tax-paying Indians feel betrayed yet again at the threat of a promised tax break being withdrawn within a couple of years after it was offered.
This means that those who availed of a 10 or 15-year housing loan assuming certain tax breaks, will suddenly find themselves in a jam because the government changed its mind again.
Second, honest tax payers who have felt harassed and ripped off by the government for decades, simply do not believe that tax rates will be reduced enough to offset the losses due to removal of exemptions.
Or, even if the government reduces tax rates initially, that it will not hike them again within a year.
So fierce is the anger that government is scurrying to distance itself from the Kelkar recommendations.
The finance minister first said that he hasn't yet read the report and then went public with the categorical assertion that there is no question of going back on long-term commitments to tax payers about certain tax shelters.
Home Minister L K Advani termed the report a mere recommendation. The Bharatiya Janata Party, which faces a crucial election in Gujarat in the coming days, has set up a committee to study the report and its recommendations.
Why is middle class India so furious? And why is the anger of this class of people so powerful that Yashwant Sinha ultimately lost the finance portfolio when his Budget seemed to hurt the honest taxpayer?
The answer is simply this. It is true that in terms of numbers, this class doesn't even count as a vote bank, but it is powerful enough to dictate public debate and influence media reports.
Moreover, the middle class does indeed have valid grounds for its distrust and resentment.
These are the people who not only pay the highest taxes, but are harassed every day and at every turn by a corrupt bureaucracy, and are sickened at the blatant corruption of venal politicians.
The two in tandem have destroyed every major financial institution, blocked economic reforms and stunted development.
Their complicity and inaction is responsible for the collapse of the Unit Trust of India, the humungous bad debts of banks and financial institutions and for hundreds of companies vanishing with investors' money raised through paper companies and fake promises.
Yet, these people seem to target and harass only the honest people at ever turn. If the Income Tax department did its job more honestly, the number of taxpayers would increase manifold.
The amount of tax collected from each assessee would not be so pathetically low that by raising the taxable level of income from Rs 50,000 to Rs 100,000 (as recommended by Kelkar), 75 per cent of taxpayers would vanish out of the tax net.
The ones left in will be mainly the salaried and honest self-employed middle class who is the target of all government experimentation and the butt of bureaucratic harassment.
Look around you and you see plenty of prosperous businessmen splurging money like there was no tomorrow but paying no taxes.
Worse are the politicians who strutting around in designer suits, ties, watches and dark glasses these days (yes, the Gandhian khadi is slowly being discarded), but pay no personal income tax.
The same class pre-empts the resources of the State to grab expensive real estate, commandeer a fleet of cars to accommodate their entourage and demand extensive security cover at the tax-payers expense to keep fellow criminals from bumping them off.
Yet, The Indian Express recently carried a series of income declarations by cabinet ministers, which showed that many of them paid just Rs 15,000-20,000 annually as tax.
The suave and controversial Telecommunications Minister, Pramod Mahajan, who reeks of power and an expensive lifestyle emerged the poorest of the lot; he declared a pathetic monthly income of Rs 5,000, which almost prompted people to send him a donation to make ends meet.
While the middle class is bled dry to meet various the expenditure of a bloated government machinery, every revenue collection agency is busy extorting money instead of ensuring compliance.
An 87-year-old investor friend who has been paying his taxes most meticulously all his life says that his Income Tax officer brazenly told him: "I don't care if you have paid all your taxes, what about (a little something for) me?"
The investor in question has a portfolio in excess of Rs 50 crore (Rs 500 million), so it didn't matter if he paid his taxes, the tax assessment officer claims a divine right to a share of income just to clear the papers.
The investor pays up, but only because he is too old to go through the harassment, frequent summons and endless questions that a refusal would entail.
"I am just too old to go through it," he tells me and snorts with anger and contempt when I ask about the former finance minister's slogan about sammaan (respect) for the taxpayer.
It the same with every revenue collection agency. The Customs officials who humiliate and browbeat you at airports trying to shake you down for some money are the same guys who have allowed our vast seacoast to be a dumping ground for deadly RDX and every form of contraband and drugs.
It is an open secret that customs officers pay millions in bribes to secure the lucrative posting in the airport, cargo terminals or ports.
The sales tax, excise and property registration departments are all more eager to collect cash in their drawers than to collect for the government's coffers.
Often, they offer helpful advice on how to break the rules or regularise and cover up blatant illegality.
Is it any wonder then that everybody detests Kelkar's idea of taking away existing tax shelters with an unreliable and inadequate promise of reduction in tax rates?