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Chidambaram sees need to prune tax incentives
November, 11th 2006
To improve tax to GDP ratio

Tax incentives need to be pruned to achieve the targeted ratio as also to meet the target set by the FRBM Act.

The Finance Minister, Mr P. Chidambaram, has stressed the need to prune tax incentives to meet fiscal responsibility and budget management (FRBM) targets and increase tax to gross domestic product (GDP) ratio.

He was addressing the meeting of the consultative committee attached to the Finance Ministry here on Friday.

Mr Chidambaram highlighted that every tax concession is introduced with a specific purpose. He, however, felt that such concessions needed to be reviewed on a periodical basis with a goal to improve the fairness, transparency and efficiency of the tax system, meet the priorities of the government and eliminate inefficient and inappropriate tax expenditures.

The Finance Minister said that in order to achieve an equitable tax structure based on moderate rates and to generate adequate resources to fund spending on social and physical infrastructure, a close, hard look at the present system of exemptions in favour of particular sections of taxpayers is absolutely essential.

He pointed out that the country's tax to GDP ratio is one of the lowest in the world. Central Tax to GDP ratio, measured using central gross taxes, peaked at 10.6 per cent in 1987-88, and dropped sharply to 8.3 per cent in 1998-99. It has risen to 10.5 per cent in 2005-06; however, it is still low and needs to be improved.

The Draft Approach Paper to the 11th Five Year Plan assumes tax to GDP ratio of 13 per cent by 2011-12. As the opportunities for raising additional resources through new taxes or higher tax rates may be limited, tax incentives, therefore, need to be pruned to achieve the targeted ratio as also to meet the target set by the FRBM Act for elimination of revenue deficit.

This will help in increasing the tax base substantially and would also enable the Government to moderate the tax rates significantly and facilitate movement towards an integrated Goods and Services Tax by 2010.

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