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New govt may change direct tax rates: Ernst & Young
May, 12th 2009

Direct tax rates may be tinkered by new government that may present its first budget later next month, according to a study.
This may be in line with changed taxation policies followed by most governments worldwide to beat slowdown and recession that set in following global financial turmoil.

In February this year, when stand-in finance minister Pranab Mukherjee presented the interim budget, he did not make any changes in either corporate or individual tax rates.

Even in the stimulus packages, India concentrated on increased government spending and indirect tax rate cuts. In this scenario, tax measures will assume greater significance for the next government, Ernst & Young (E&Y) said on Monday in a report on tax trends in fiscal stimulus packages across the world.

The new government would do well to introduce measures such as providing for carry back of losses, possible reduction in corporate and personal tax ratesperhaps by doing away with surcharge, accelerated bonus depreciation for new plant and machinery, among others. Such measures will accelerate investments, boost productivity and employment, says Satya Poddar, partner, E&Y.

Other analysts, when contacted by Financial Chronicle to get their views on tax policy of the next government, said a lot would depend on which political parties are going to constitute the new government.

Pratik Jain, executive director, KPMG, said though the tax policy would be driven by the new governments focus, every government would like to align the existing tax rates if the goods and services tax has to be introduced by 2010.

Depending on the prevailing situation, the government may consider increasing the service tax rate, while excise duty may continue at the same rate till economy revives.

Rahul Garg, executive director, Pricewa-terhouseCoopers, said, Cut in tax rates or change in tax slabs does not lead to more demand as people prefer to save rather than spend and create demand. The government would rather provide money through the monetary policy. It cannot compromise on tax collections, as it needs money for immediate funding of infrastructure projects. .

Poddar said the depreciation rates in India are very restrictive and the government could have used this opportunity to increase the depreciation rate. Like in many nations, India could have provided tax incentives to equipment and technology used in promoting green energy, he added.

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