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FM hints at lower tax rates
November, 08th 2006

Tax rates on corporate and personal income could come down further. This is straight from the horses mouth. Speaking at the annual Economic Editors Conference, finance minister P Chidambaram said, There is scope for further tax moderation; however, this will depend upon greater tax compliance. What transforms this general statement of policy intent into sweet music is the reality that tax compliance has indeed been going steadily up.

The FM also cautioned against run-away tax concessions and exemptions as part of sectoral policies, saying revenue sacrifices will make it difficult to meet the fiscal consolidation targets under the Fiscal Responsibility and Budget Management (FRBM) Act. I am happy to note that the attitude of assessees towards taxes seems to have undergone a remarkable change. Both corporates and individuals seem to have imbibed the principle that honesty is the best policy. This attitudinal change, in my view, is the result of moderate and stable tax rates, Mr Chidambaram said, adding, the test was the secular rise in the tax to GDP ratio.

The tax-GDP ratio of the Centre has increased from 8.3% in 1998-99 to 11.2% in 06-07. The present direct tax slabs of 10%, 20% and 30% have been set in 1997.

Subsequently, the only changes have been in the threshold levels of income for the different slabs. The corporate tax rate was reduced to 30% in Budget 05. In Budget 06, the government hiked the rate of minimum alternate tax from 7.5% to 10%.

The ministers comments at the conference are significant with the Budget exercise having already begun. The statistics reeled off by him shows that there has been a 30.56% rise in income tax, including FBT and STT, and a 47.88% rise in corporate tax collections in 06-07, year-on-year.

This, when nominal GDP growth is in the range of 13%-14%.

The FM also sounded a note of caution against tax concessions. While policies aimed at giving a thrust to the sector concerned are necessary and desirable, such policies should rely more on better infrastructure, new technology and removing any structural constraints. The magnet for new investment should be better infrastructure and not tax concessions.

The government is negotiating tax package for the semi-conductor industries, IT hardware and petro-chemical zones. It has already decided to examine all tax sops this year afresh. Budget 06 has withdrawn I-T exemption for investment in infrastructure and other projects under Section 23G of the Income Tax Act. The government could follow suit on more such sops in the forthcoming Budget. This could be more so since the revenue carte blanche to SEZs will have some impact on collections.

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