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Budget to focus on tax reforms
The Union Government, striving to spend more on poor and cut deficit, may widen tax net and streamline tax structure.
The Union Government, striving both to spend more on the poor and cut its deficit, is likely to widen the tax net and streamline its complex tax structure in Budget 2005.
The Congress-led coalition, elected last year on a pledge to improve the lot of 260 million Indians living in poverty, is expected to target both corporate and personal taxes in its second budget on February 28 as it tries to pay for more spending on health, education and infrastructure.
With value-added tax (VAT) scheduled for introduction on April 1, Finance Minister Palaniappan Chidambaram is already pushing tax reform in Asia's fourth-largest economy, where only three per cent of people pay taxes.
Analysts say the Government must improve compliance, cut exemptions and boost economic activity if it wants to fund new spending without increasing debt or breaking a law committing it to deficit reduction.
"The emphasis will be to make the tax system work better both in terms of ease and also ensuring there is not too much leakage," said credit rating agency ICRA's chief economist and a member of the Prime Minister's economic advisory panel, Saumitra Chaudhuri.
"There is lot of scope for reforming the tax structure. It will be the centrepiece of this Budget."
Indian taxes amount to nine per cent of gross domestic product, (GDP) nearly unchanged for a decade and much less than the 20 per cent seen in Brazil, another large developing economy.
India's system is littered with exemptions and rules that often aid rather than prevent tax evasion.
The Government wants to double annual health and education spending to $50 billion.
Analysts say higher revenue is the only way to pay for it, because the Government is already struggling with debt. Interest payments swallowed half of the Rs 2.54 trillion ($58 billion) the Government raised in taxes last fiscal year ended March 2004.
A panel of experts reported in July on how to reform the tax system, and analysts expect its recommendations to form the basis of measures in the 2005-06 Budget.
The panel, led by former International Monetary Fund official Vijay Kelkar, recommended scrapping tax breaks on Government-run saving schemes for individuals and condensing income tax to a two-rate structure from the three tiers of 10, 20 and 30 per cent.
