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FM plans hard look at tax exemptions
November, 11th 2006

Finance minister P Chidambaram is likely to take a hard look at tax exemptions in the forthcoming Budget. He is, however, unlikely to introduce any new taxes or hike tax rates to raise additional resources.

According to the Budget document for the current fiscal, the total revenue foregone due to various direct and indirect tax sops was estimated at Rs 1,58,661 crore in 2004-05. Every tax concession, although introduced with a specific purpose, needs to be reviewed on a periodic basis to make the tax system more efficient, Chidambaram said at a meeting of the consultative committee on finance on Friday.

The minister said tax sops needed to be pruned to meet the targets of Fiscal Responsibility & Budget Management. The FRBM Act requires the revenue deficitat 2.6% of GDP in 2005-06to be cut 0.5% a year and eliminated by 2009. Likewise, the fiscal deficit, at 4.1% of GDP, is to be trimmed by 0.3% of GDP a year to 3% of GDP by 2009.

Stating that Indias tax-GDP ratio was one of the lowest in the world, he also said it was imperative to increase it. The draft paper to the Eleventh Plan assumed it to touch 13% by 2011-12. While the tax-GDP ratioat 10.5% in 2005-06is estimated to go up to 11.2% in 2006-07, it is well below the 13% target assumed in the Eleventh Plan that begins next fiscal.

To generate adequate resources for funding the countrys infrastructure needs, Chidambaram said tax incentives needed to be pruned. This will help in increasing the tax base and also enable us moderate the tax rates significantly, he said.

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