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FM hints at moderate 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 being going steadily up.

The FM also cautioned against runaway tax concessions and exemptions as part of sectoral policies, saying revenue sacrifices would make it difficult to meet the fiscal consolidation targets under the FRBM Act.

"I am happy to note that the attitude of assesses 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 that the test was the secular rise in the tax to GDP ratio, which has risen from The tax-GDP ratio of the centre has increased from 8.3% in 1998-99 to 11.2 % in 2006-07. .

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 2005. In Budget 2006, 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 there has been a 30.56% rise in income tax including FBT and STT, and a 47.88% rise in corporate tax collections in 2006-07, year on year. This, when the nominal GDP growth is in the range of 13%-14%.

The finance minister also sounded a note of caution against tax concessions. "While policies aimed at giving 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 concessions package for the semi-conductor industries, IT hardware and petro-chemical zones.

The government has already decided to examine all tax exemptions this year afresh. Budget, 2006 has withdrawn income tax exemption for investment in infrastructure and other projects under the section(23G) of the Income Tax Act. The government could follow suit on more such exemptions in the forthcoming budget. This could be more so since the revenue carte blanche to special economic zones would have some impact on collections.

On SEZs Mr Chidambaram said while the revenue department had given its estimates on the possible loss, the exact numbers would be known only after the zones get off the ground in 6 months to one year.

He also said with tax collections showing considerable buoyancy, the government was confident of achieving the budget estimates. But the minister added that unless there was a compelling need, new programme requiring additional sums of money should not be floated in the middle of the year. "The budget has certain sanctity and that should be respected," he said, and made it clear that there would be no pause button on meeting the deficit reduction targets set out in the FRBM.

Mr Chidambaram said there was a need for more reforms to move the GDP growth rate towards 9%. "The successful evolution of India as a major economic power rests on the deepening of reforms both on institutional and governance fronts". According to him the sectors that needed priority were agriculture, energy and infrastructure to make the economy more vibrant.

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