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Tax Structure gets vitiated further
May, 03rd 2010

Finance minister Pranab Mukherjee has made token concessions for sectors like housing and air travel in the official amendments to this year's Budget. Sure, giveaways of Rs 400 crore are paltry in the Centre's Rs 10 lakh crore Budget. However, they send out the wrong signal, on two counts.

One, the government doesn't care about simplicity and uniformity in taxation of goods and services ; and two, individual industries and sectors are welcome to lobby for and obtain individually tailored duty regimes. Concessional import duty rates, exemption from service tax, lower rates of excise duty, etc, are enemies of tax rationalisation.

They spell patronage and arbitrariness and distort the tax structure. Ideally, the government should have reversed commodity-specific and sector-specific duties and reverted to uniform rates of duty. It has, however, faltered here. The Budget itself offered up a clutter of rates.

The changes brought to the Finance Bill show that the tax system has been cluttered even more, with multiple import duty rates, lower excise rates and service tax exemptions to specific sectors in an arbitrary way.

This will also hamper the proposed move to a harmonised goods and services tax countrywide. If the Centre itself cannot have the discipline to have uniform rates of indirect tax for goods and services that have little rationale for being subjected to differential tax treatment, how are 28 state governments expected to agree on uniform rates on their part?

The model GST, recommended by the Thirteenth Finance Commission (ThFC) and accepted by the Centre in principle, allows for no exemptions other than a small common list that includes health and education.

The government should try to implement ThFC recommendations with the concurrence of the empowered committee of state finance ministers at the earliest.

A course correction is possible even this year, as changes in indirect taxes can be done outside the budget. Multiple indirect tax rates create room for lobbying, patronage and, worse. Surely, that is not what the government wants.

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