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FM hints at tax cuts, yields to area-wise incentives
August, 02nd 2007

Finance minister P Chidambaram on Tuesday reiterated his intent to trim tax rates, thanks to better compliance by taxpayers and the broadening tax base. He also held out a special dispensation for promising sectors like food processing, electronic hardware, hotels and tourism and leather goods while admitting that area-based tax exemptionsof the kind enjoyed, for example, by the hill stateswould have to continue for the time being. These exemptions are considered inefficient by tax experts.

The FM said a larger tax base coupled with better compliance augurs well for a rate cut. We should not hesitate to reduce rates further in an environment of a rapidly-growing economy; we ought to be prepared to act on the premise that revenues would nevertheless be more buoyant, he said in his convocation address at the University of Hyderabad.

Mr Chidambaram also plumped for sparing small entrepreneurs from tax. To allow small entrepreneurs to flourish, a threshold has to be provided only above which taxes may be imposed, he said.

Though he admitted that such sops could drain the exchequer, the FMs rationale was that area-wise sops would remove past inequities while incentives to promising sectors would fuel growth.

Although the government has been talking of pruning exemptions, it may not be ready yet. Area-specific tax holidays exist in regions like Baddi in Himachal Pradesh and North-East, which have seen heavy investments. Similarly, the IT industry grew scale, backed by Software Technology Parks of India (STPI) benefits.

The government has budgeted gross tax collections at Rs 5,48,122 crore in FY08, which is 17% higher than the revised estimate for FY07. With the economy growing at a fast clip, tax revenues have been buoyant over the last two years. The highest tax rate for individuals is 30%. The statutory corporate tax rate for domestic companies is 33.99%. But the actual payout is lower for many companies as they enjoy tax exemptions.

Tax experts say a lowering the corporate tax rates to what is prevalent in countries such as Singapore and Hong Kong could pull in more investments.

The FM said temporary area-based incentives may be unavoidable to offset past inequities among different regions in the country. Such measures are needed to ensure equity, though it could drain resources.

According to him, there was also a case for special dispensation to select sectorssuch as food processing, electronic hardware, leather products, hotels and tourismto sustain the growth momentum. We should not shy away from selecting leading sectors of growth and offering them encouragement, he said. These sectors were given a few sops in this years budget and more could be in the offing, next budget.

In the past, sectors such as steel and textiles enjoyed a special dispensation which aided their growth. Its the same story for small automobiles: India is on its way to become an auto hub, thanks largely to the cut in indirect taxes, he said.

Chidambaram was also confident that the proposed goods and services tax (GST) will improve the countrys competitive edge vis--vis international competitors that do not have overbearing taxation at two levels of government and whose burden of indirect taxes is not so high as in India.

The GST, which would integrate state and central taxes on goods and services, is set to be introduced in April 1, 2010. The spadework has already begun, said Chidambaram.

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