While finance minister P Chidambaram has indicated moderation in tax rates to improve compliance and enhance collections, the government is contemplating imposing new taxes worth Rs 14,500 crore in Budget 07 to mobilise more resources for the Eleventh Plan (07-12).

According to official sources, a proposal for additional taxation by around 0.4% of the GDP or roughly around Rs 14,500 crore is being considered by the government which once implemented may mean increasing the existing tax rates and also finding avenues for fresh taxation.

Despite the new taxes, there would be a shortfall in the Budget support for plan expenditure. For instance, the gross budgetary support (GBS) has now been reduced to a growth of 2.1% of GDP in the revised plan projection from the earlier estimate of a 2.5% increase.
Sources said the new tax proposals and reduced GBS support has been included in a revised draft approach paper for the new plan after the finance ministry expressed doubts over raising enough resources for meeting plan funding while keeping the Fiscal Responsibility and Budget Management (FRBM) targets intact.

The earlier draft has already been cleared by the full Planning Commission recently. The changes that have now been incorporated will be placed before the Cabinet for approval soon.

In its comments on the draft approach paper earlier, the finance ministry has objected to the Planning Commissions assumption of a tax buoyancy of 1.25% for the five-year period to achieve a 9% average GDP growth rate with enhanced social sector expenditure.

The ministry had made it clear that alternatives would have to be found to mobilise resources quickly as the new plan is slated to start from next fiscal.

Sources said the revised draft of the Eleventh Plan has suggested two alternatives for meeting targeted reduction in fiscal deficit under the FRBM Act while increasing GBS by 2.1 percentage points.

Either substantially lower pla-nned expenditure or raise resources through additional taxation by around 0.4 percentage points of gross domestic product.

As cutting planned expenditure would be difficult, new taxes could be the right alternative to mobilise resources, they added.

The Planning Commission has also revised the projections to bring down non-plan expenditure of the government during the new plan period. The revised draft approach paper has assumed that growth of non-plan expenditure of the government would be limited to 5% per year in real terms. With a 9% growth in GDP, this would mean that non-plan expenditure would come down from 23% of GDP in the 10th Plan to around 19% (earlier pegged at 18%) in the 11th Plan.