Amendments to lower debt, equity costs, says Kelkar

NEW DELHI: The tax reforms recommended by the Kelkar Panel are designed to boost industry’s competitiveness by lowering transaction costs, interest rates and the cost of equity. This was explained by Vijay Kelkar at a Ficci conference on tax competitiveness.
Simplification of procedure to facilitate compliance by taxpayers, reliance on trust, intelligent compilation of data through electronic means for purpose of assessment and lower rates are the running themes of the recommendations.
The proposed tax structure rewards outcomes rather than corporate willingness to toe arbitrary choices made by the government with regard to investment priorities. This is important in a dynamic globalising scenario, in which entrepreneurs rather than governments are better judges of what is the right investment opportunity. This is part of the justification for doing away with the plethora of incentives and exemptions given for investment in particular sectors and locations. In order to promote particular sectors, the government has the option of expenditure measures, which are a whole lot more transparent than tax exemptions.
The Kelkar Panel proposals bring down transaction costs in several ways. A universal green channel for imports, proscribing of arrests by excise personnel are prime examples. Minimising direct interface with tax officials is an important tool envisaged to reduce transaction costs.
How will the panel recommendations bring down the cost of capital? In the case of equity capital, elimination of taxes on dividends and long-term capital gains on equity bring down costs.
The cost of debt capital comes down for more complex reasons. One is straightforward. Increase in tax-GDP ratio will have the effect of reducing government’s reliance on borrowings to finance its expenditure. Lower demands by the government on the savings generated in the economy will bring down interest rates. Currently, the government appropriates 80% of long-term financial savings, Mr Kelkar said.
The other reason why the panel recommendations will bring down interest rates has to do with the asymmetry in rationality at micro and macro levels. At the micro level, individuals would love to have subsidised interest rates on housing loans and artificially high (including tax benefits) on small savings. Such segmentation of the credit market, however, has the result of pushing up overall interest rates. Thus, what is rational at the micro level turns out to be irrational at the macro level.
Even individuals who have taken housing loans, who currently apprehend being penalised by the recommended withdrawal of tax benefits on their debt servicing, will gain from lower interest rates and lower tax rates. And lower capital costs will boost investment in general, not just in particular sectors.