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Survey asks Govt to moderate tax rates

Economic Survey prescribes a tax reform mantra to unburden India Inc, phasing out distortive exemptions and cutting deficits.

india Updated: Feb 27, 2006 13:18 IST

Buoyed by about 19 per cent jump in tax collection, the government may further moderate taxes in the Budget with the Economic Survey prescribing a tax reform mantra to unburden India Inc, phasing out distortive exemptions and cutting deficits.

"To be competitive globally, Indian industry needs to be unburdened from the high level of taxes and the distortive exemptions that provide perverse incentives," said the Survey for 2005-06, tabled in Parliament a day before the Union Budget.

The process of withdrawal or "grand-fathering" of tax exemptions is being speeded up and higher revenue is being collected even with unchanged or lower tax rates, it said but advocated raising the Tax-GDP rate to attain the targets set in Fiscal Responsibility and Budget Management Act.

"It is critical to raise Tax-GDP ratio to 13 per cent by 2008-09 and effect shift in the composition of expenditure in favour of those creating productive assets."

Though growth in tax collection at 18.8 per cent during April-December 2005-06 is the highest in last five years, the survey said: "Some pressure points are there in the form of below par performance in excise and corporate tax."

While there was some "downside risks" of not achieving the revenue targets, it said: "There is room for some expenditure compression with tight financial discipline, the fiscal and revenue deficits budgeted could be met."

Listing out challenges for achieving FRBM target, it said higher 22 per cent growth in revenue can be attained annually through moderate rates, wider taxpayer base, grand-fathering tax exemptions, reliance on voluntary compliance with effective and fast penal mechanism.

The survey also advocated simplification and digitisation of tax administration and taxpayer facilitation measures to shore up revenue.

While a higher Tax-GDP ratio could make available more resources for social infrastructure and developmental projects, the survey said there was much scope for expenditure control by imposing user charges on public utilities, better targeting of subsidies, merging schemes with same objectives and cutting down time and cost overruns.

All these measures are necessary for cutting fiscal and revenue deficits of the central and state governments, which in turn will sustain higher 8-10 per cent growth, it said.

"Fiscal policy is a critical component of the policy framework for achieving sustained annual growth of 8-10 per cent with macro-economic stability," it said.

High deficits, unproductive expenditure and tax distortions have constrained the economy from realising its full growth potential, it added.

With FRBM Act in place, the survey said fiscal deficit has declined to 4.1 per cent of GDP in 2004-05 from 5.9 per cent in 2002-03 while revenue deficit came down from 4.4 to 2.5 per cent.
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The fiscal and revenue deficit for 2005-06 is budgeted at 4.3 per cent and 2.7 per cent of GDP.

While Centre continues to pursue the path of fiscal consolidation as per FRBM Act, the survey said states complemented the efforts in line with the recommendation of 12th Finance Commission.

First Published: Feb 27, 2006 13:18 IST