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FM eyeing more services to cast tax net wider

A cross-section of bankers feel that the budget proposal might widen the tax net for greater mobilisation.

india Updated: Feb 27, 2006 12:23 IST

Backed by robust economic fundamentals, Finance Minister P Chidambaram is expected to roll out a roadmap of stability and growth with a narrower focus on infrastructure and agriculture in his budget proposals for 2006-07.

A cross-section of bankers feel that the budget proposal might widen the tax net for greater mobilisation. The emphasis will be on bringing in more services under the ambit of service tax, even as he attempts to simplify the contentious fringe benefit tax (FBT). However, with assembly elections slated for five states in the short term, reducing the fiscal deficit would be a difficult proposition. Employment generating sectors like textiles, leather, food processing and auto components will at the same time get fiscal incentives in the budget.

Although service tax is expected to remain at 10 per cent, the base may expand by bringing more services under the tax net. Currently, 81 services are taxed. The service sector contributes more than 50 per cent to the GDP, even as it gives five per cent of tax revenues. Legal and medical services, which have so far escaped the service tax net, may come under its purview in this budget.

Industry experts feel that the government would either rationalise FBT or may introduce a flat rate for the corporate sector so as to simplify the whole process. The infrastructure sector is expected to get special attention. A higher spending is also anticipated for infrastructure especially for the Bharat Nirman programme, National Rural Employment Guarantee Programme and the Urban Renewal Mission. Besides creating fresh jobs, this will also help in driving the economy at a faster rate.

Sources said that the FM would provide a special package to bank deposits so as to bring down the cost of deposits with the banks. Banks are competing with other market players like mutual funds and insurance companies to tap the same market. Currently, the deposit rate on long-term deposits of more than five-year tenure is more than 7.5 per cent. This has a cascading effect on the lending rate. Long-term bank deposits are likely to be part of the Rs 1 lakh tax saving exemption limit. The budget may also announce a roadmap for bringing some savings under the EET mode, which will enable taxing only withdrawals. In fact, increase in the savings rate was highlighted by the Prime Minister as one of the key factors to put the economy on a sustained growth rate of eight to 10 per cent per annum.

To wean away investment from small savings schemes to the equity and debt markets, the budget is likely to bring investment in mutual funds to the list of savings instruments exempted from income tax. Besides, the budget may bring debt funds on par with equity schemes by abolishing longterm capital gains tax on them. The FM may also do away with duplication of securities transaction tax on unit-linked schemes. Both the PM and FM have already stated that customs duties would be brought down to Asean level of eight to nine per cent peak duty.

It is to be seen if Chidambaram will reduce the present peak customs duty of 15 per cent in one go or in phases. Services offered by multiplexes, fashion designers, healthcare and trade fairs may also come under the tax net to please the Left parties, whose other proposals are too extreme for the FM to incorporate in the Budget.

There is speculation that cars might become cheaper as the special additional excise duty of eight per cent would be withdrawn to move towards a single rate of 16 per cent excise duty. Aerated drinks also attract eight per cent special duty.

Sneak Peeks

81 Services already in tax net

On target Legal, medical services, multiplexes, fashion designers, healthcare and trade fairs The service sector contributes more than 50% to the GDP, even as it gives 5% of tax revenues.

Inside the briefcase

Employment generating sectors like textiles, leather, food processing and auto components may get fiscal incentives.

Special package likely for bank deposits so as to bring down the cost of deposits with the banks. Long-term bank deposits are likely to be part of the Rs 1 lakh tax saving exemption limit.

Investment in mutual funds may be brought to the list of savings instruments exempted from income tax.

FM may also do away with duplication of securities transaction tax on unit-linked schemes.