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Direct tax revenue to exceed indirect tax this year
June, 02nd 2008

A surge in honesty explains tax buoyancy, says the Finance Minister's adviser on tax policy. Direct tax collections are poised to exceed indirect tax revenue for the first time. But a rate cut might have to reckon with opposition from the Left parties, reports CNBC-TV18.

 When Finance Minister P Chidambaram projected a 16% rise in direct tax collections for this year, he had admitted it was a stretch target, because they were on top of a 39% rise in collections last year. But income taxes, both on companies and individuals, have grown by 43% so far, making it a record year for direct tax collections.

 According to Parthasarathi Shome, Adviser to Finance Minister, Historically, we are experiencing the highest rate of growth in income tax revenue in India and the highest that I have seen across the globe on a sustained basis.

 Direct tax collections have growth by over 40% for the second year in a row, much higher than the 26% average growth seen in the previous three years. Economic growth and higher corporate profitability have helped. And with the tax department equipping itself with the capability to ferret out income data from spending patterns, earners seem to have become more honest as well. This is because, revenue is growing at more than the conventional compliance measure of two times nominal GDP growth.

 Economy is growing at 13%, but revenue is growing at 43%. The gap is between 3 and 1. We are getting voluntary compliance. We should do some structural changes, added Shome.

 And for the first time, the tax department expects direct tax collections to exceed revenue from indirect taxes by the middle of December, if they have not already done so. This was one of the aims of tax reform, to decrease the share of indirect taxes. There is a case for a rate cut but exemptions will have to go. Because of these exemptions, large companies effectively pay a rate of 18%, while the smaller ones pays around 26%.

 We have to be competitive. We are constantly on the vigil, Shome said.

  The Adviser to the Finance Minster says that ideally, the income tax rate for both companies and individuals could be 27.5%. That surcharge must go and the exemption limit for salaried earners should be Rs 3 lakh. But his private opinion may not become public policy because of opposition from the Left parties that believe in taxing and spending.

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