The report tabled in Parliament on Friday said the scheme announced in the 1998-99 budget discriminated against those tax payers who had cleared disputed tax amounts while their appeals were still pending and favoured those who did not.

The committee headed by Murli Deora asked the finance ministry to consult the law ministry to remove some basic flaws in the scheme under which an assessee can make a declaration only if taxes were in arrears.

This created unnecessary hardships to assessees who had paid disputed taxes either to cooperate with the department or due to coercive steps of recovery while their appeals were still pending. Such assessees cannot make a "samadhan declaration" as they had no tax +arrears.

Thus, the committee said, those who have disputed the tax in appealbut not paid the amount have an advantage over those who have disputed the tax but paid it pending a decision on their appeals.

The revenue secretary during his deposition before the committee agreed to the suggestion that the definition of eligibility for availing the scheme needed to be broadened and the law ministry would be consulted in this regard.

The samadhan scheme is to come into force with effect from September 1 and will be in operation till December end this year.

The committee has also warned the government that its failure to contain fiscal deficit would lead to a cascading effect on interest rates.

The report said a higher fiscal deficit will lead to pre-emption of available scarce capital by the government pushing out commercial sector from raising funds from the market.

This in turn will result in hardening of interest rates, the report said, adding downgrading of India's credit rating by international rating agencies after sanctions could also push up lending rates.

"Hence, anysignificant increase in borrowing of the government to finance its unproductive or consumption expenditure is something that the country can ill-afford at this critical juncture," the report said.

The committee members noted with concern that half of the revenue expenditure and entire plan expenditure is currently met from market borrowings.

As regards reducing expenditure, government should target considerable reduction in revenue expenditure especially its non-plan expenditure, the committee report said.

On the capital market, the committee said newly set up private banks should not be allowed to postpone their public issue. "The newly set up private sector banks, which as per the Reserve Bank of India stipulation are required to raise capital from the public, but could not do so and got extensions, should not be given any further extension and they be made to tap the market for capital this year...," the committee said.

The report said such a move would go a long way in improving the subduedsentiments prevailing in the markets.

It asked the Securities and Exchange Board of India to conduct an enquiry into erratic and volatile behaviour of the stock markets and submit the report to the committee expeditiously.

The report said the continued decline in the number of issues as well as the amounts raised by way of equity and rights by corporates do not augur well for companies which want to go public.

The committee said there was a distinct possibility that many corporates would abandon their plans to raise capital abroad due to widening of the spreads and sanctions.