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Govt to simplify taxes, boost revenue in budget

Analysts say the government will probably slash import duty to bring it more in line with the country's neighbours.

india Updated: Feb 25, 2006 12:47 IST
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The UPA government is likely to cast the tax net wider and simplify the tax structure in its annual budget on Feb 28, as it seeks more funds to spend on the poor without blowing a hole in its finances.

Analysts say the government will probably slash import duty to bring it more in line with the country's neighbours while still pursuing its drive to raise revenue for projects aimed at 260 million poor by phasing out some tax breaks and taxing more services.

The government is seen having to improve tax compliance, remove exemptions and further streamline collection if it wants to fund new spending without increasing debt or breaking a law that commits it to deficit reduction.

"The emphasis will be on widening the tax base. There will be an incremental effort to reform the system," said V Anantha Nageswaran, director of Libran Asset Management, Singapore.

"I hope there will be a concerted effort to ensure that the benefit of evasion is lower than the benefit of paying taxes."

The strategy is not new. The government has made tax reform the centre of its fiscal policy since being elected in May 2004, subscribing to the view that lower taxes lead to greater compliance.

The concept has worked so far, as tax collection to gross domestic product is expected to rise to 10 per cent this financial year from 8 per cent in 2002. Yet that is still just half the level of Brazil, another large developing economy.

Though Chidambaram is not expected to tinker with corporate or income tax rates this year, the potential to boost India's receipts is tremendous as the system is littered with exemptions and rules that often aid rather than prevent tax evasion.

Only 3 per cent of the billion-plus population pay income tax.

Cranking up the tax take

The cash-strapped government needs every penny it can get to double spending on health and education to $50 billion, as promised in its policy blueprint unveiled in 2004.

Higher revenue remains its only option for funding that since it already struggles with interest payments on debt that account for nearly half the Rs 2.73 trillion it expects to raise in taxes this financial year ending on March 31, analysts said.

To ramp up collections, Finance Minister Palaniappan Chidambaram may lower the depreciation rate on capital goods and increase the rate on a securities transaction tax, analysts say.

But he will have some goodies on offer as well.

Customs duty is likely to be slashed to 10 per cent from 15 per cent while an unpopular fringe benefit tax, introduced last year on employees' perks, may be simplified. The fringe benefit tax is criticised by firms as double taxation.

Excise tax, a levy on manufacturing, is also likely to be cut in some cases. The government expects the revenue loss will be made up by increased economic activity.

"Their (government's) efforts are bearing fruit and I think they will continue with tax compliance as a central theme in this budget," said Sanjeet Singh, economist with ICICI Securities.

"We can also expect more services in the tax system."

Services are the fastest-growing part of the economy but are largely untaxed. Analysts said the budget could draw doctors and the booking of rail and air tickets into the net and the tax rate itself is likely to rise by 2 percentage points to 12 per cent.

Services account for half of the output in the $700 billion economy but are expected to provide only about 6 percent of total tax receipts to be collected this financial year.

Chidambaram's eagerness to grab more from services also stems from a desire to cut the fiscal deficit to about 4 per cent of gross domestic product in 2006/07, complying with a law binding the government to cut it by 0.3 percentage points each year.

The deficit is likely to stand at 4.3 per cent this year.