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Economists not for cut in direct tax rates
January, 10th 2008
Chidambaram told to use revenues to rationalise indirect taxes


Focus on infrastructure: (From right) The Union Finance Minister, Mr P. Chidambaram; the Ministers of State, Mr S.S. Palanimanickam and Mr Pawan Kumar Bansal; and the Finance Secretary, Mr D.Subbarao, at the pre-Budget meeting with economists at North Block 

Economists have urged the Finance Minister, Mr P. Chidambaram, to retain direct tax rates at current level, stating that it may not be prudent to cut rates when potential fiscal pressures such as Pay Commission and certain off-budget liabilities would surface to the centre stage in the next couple of years.

They want the Government to use the current tax revenue buoyancy to improve infrastructure expenditure and rationalise indirect taxes, especially those relating to the oil sector, given that tax composition in oil price was as high as 57 per cent.

There was a suggestion that given the somewhat different and turbulent global environment that the economy faces and the number of fiscal stress points like Pay Commission, oil bonds in the offing, it may not be prudent to take this (current tax revenue buoyancy) as a permanent change in tax-GDP ratio. Some of them said it would not be prudent to cut direct tax rates, Mr Subir Gokaran, Chief Economist, Asia Pacific, Standard and Poors, told newspersons after the pre-budget meeting that the Finance Minister had with economists at North Block here today.

ICRIER Chief Executive, Mr Rajiv Kumar, said that reduction in indirect taxes on oil products would have neutral impact on consumer and also give more relief to oil industry. He added that many economists had submitted to the Finance Minister at the meeting that there was no evidence to show that further reduction of tax rates would lead to greater revenues.

While noting that rupee appreciation was a concern for the economy, Mr Kumar said that a slew of suggestions were made in this context.

We have told the Finance Minister that he should take a pause on customs duty in this budget as rupee appreciation has already helped in reducing the value of imports.

A Tobin tax like levy has also been suggested on inflows into real estate and equities to reduce the returns on inflows into such areas, he said.

The economists have urged the Government to increase the usage of market stabilisation scheme (MSS) bonds as the cost (of such bonds) was not very high.

It was also pointed out that the Finance Ministry needs to take a good look at excise duties and that more buoyancy could be achieved in this area.

On subsidies, Mr Kumar said that the Government was requested to reduce subsidies or at least make them more efficient through use of vouchers.

On research and development (R&D), it has been suggested that the Government must look at providing direct subsidy for R&D efforts of companies instead of providing allowances.

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