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Govt to eliminate tax incentives to check deficit
August, 21st 2008
Faced with the task of reducing fiscal deficit and curbing inflation, the government today indicated it would eliminate the present tax incentives and exemptions to raise revenue collection. At the same time, the government may also step up deterrent action against direct tax evaders, the revenue secretary, Mr PV Bhide, today said at a Ficci seminar on direct taxes.
We have no choice but to control the fiscal deficit, not just as an economic necessity but also as a legal obligation, Mr Bhide said. Since indirect taxes need to be brought down to control inflation, the share of direct taxes in the overall tax-GDP ratio has to be necessarily increased. The only option left on this front is to eliminate incentive and step up deterrence, he added.
The government was not in a position to cut non-Plan expenditure and mobilise additional resources through indirect taxes, the expenditure secretary added, pointing out that the option was not available as the rates today were minimal.
Reducing fiscal deficit had become all the more important to control rising inflation, he said, noting that the price rise had been on account of domestic as well as global factors. The need for reducing high fiscal deficit, which initially arose to prevent crowding out investment, has become all the more important to control present inflation, which is not only due to factors within the country but also on account of global environment, said Mr Bhide. 
Inflation has soared to a 13-year high of 12.44 per cent despite host of fiscal and monetary steps taken by the Central government and the Reserve Bank of India.
Mr Bhide said: Since indirect taxes have to be brought down to control inflation and to honour international obligations in the context of a globalising economy, the share of direct taxes in the total GDP will necessarily have to go up. We will try to do it as easily as possible. In the last two years, the growth in direct tax collection has been in the range of 35 per cent to 40 per cent. This is a welcome sign, compared with the previous years when additional resources arose only from additional taxation. This time, growth has also been due to greater compliance and simplification of tax rates, he said.
Indias total tax-GDP ratio, which was at 17.5 per cent, needed to be stepped up to mobilise additional resources for reducing fiscal deficit and funding social sector programmes of the government, he added.
The revenue secretary also expressed optimism that the Goods and Services Tax (GST) would come into force from 1 April, 2010. The empowered committee of state finance ministers had given its first stage report, he said adding We are examining it.
Mr Bhide explained that the revenues of the states were buoyant, following implementation of VAT and a larger transfer of resources from the central governments kitty. The financial position of the states is better today than it was a decade ago. That should encourage them to move forward and adopt the GST. I remain confident that since we have been able to bring the states on to the VAT wagon, we should be able to get them on the GST wagon by April 2010, he added.
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