The Indian government is proposing sweeping reforms of the tax system that would reduce the tax burden on ordinary Indians but come down hard on the evasion, exemptions and loopholes that plague the system. A commission led by Vijay Kelkar, an adviser to Finance Minister Jaswant Singh, has published proposals that would radically simplify income tax. India's tax system is woefully unsuccessful in getting Indians to pay tax. At 9 per cent of gross domestic product, the central tax collection rate is one of the lowest in the world. One reason for tackling the outdated tax regime is that Mr Singh knows he must reduce India's ballooning fiscal deficit which hit an all-time high of 11 per cent of GDP this year. The biggest reform the Kelkar report proposes is raising the personal tax exemption limit from the current 50,000 rupees (HK$8,150) a year to 100,000 rupees. Because of all the loopholes and the rampant tax evasion, only 30 million Indians pay income tax. Three-quarters of these declare less than 100,000 rupees a year, and the recommendation frees them from direct taxation. The other far-reaching recommendation is that there should be just two income tax bands - 20 per cent for Indians with annual income of between 100,000 rupees and 400,000 rupees, and 30 per cent for those with incomes above 400,000 rupees. All exemptions to income tax, which run to thousands of pages, would be abolished, making it harder for Indians to indulge in tax evasion. At the moment, those in the top income bracket - earning one million rupees or more a year - simply bribe the tax collector to redefine income as something else. It is the average white-collar employee who earns no more than 250,000 rupees a year who has to comply. The final version of the report is a diluted version of an earlier, more controversial document which proposed introducing a new tax on agricultural income, taxing income saved for old-age pensions and removing tax exemptions for housing loans - all sacrosanct in the eyes of the middle class. Popular pressure, and unwillingness by the ruling Bharatiya Janata Party to antagonise the middle class ahead of elections in five states, compelled the commission to ditch or water down these suggestions. On indirect taxation, the Kelkar taskforce recommends three bands for Customs duties by 2005 - zero per cent, 10 per cent and 20 per cent. Rationalising indirect taxes would boost government revenues, the report argues, because fewer goods would be exempt from sales tax or Customs duty. The Kelkar proposals will be considered in the drawing up of India's 2003/04 budget.