Even as constitutional propriety came in the way of making any changes in taxation rates in the Interim Budget, External Affairs Pranab Mukherjee, who holds charge of Finance, on Monday argued in favour of a reduction to induce higher spending and domestic consumption in the wake of the worsening global scenario.

In his Interim Budget speech in the Lok Sabha, Mr. Mukherjee said: In the days of financial stress, tax rates must fall and our ability to pay taxes must rise.

With the fiscal deficit projected to touch 6 per cent for the current fiscal as compared to the budget estimate of 2.5 per cent, tax collections, he said, were of little help in view of the Rs 60,000-crore shortfall, primarily owing to the governments pro-active fiscal measures to counter the impact of global slowdown.

Planned expenditure may have to be increased substantially by the new government... since the scope for revenue mobilisation is limited in a period of slowdown, rise in plan expenditure will increase fiscal deficit, he said.

For the new regime at the Centre, the Minister indicated that the way forward would be to pursue the UPA governments exercise of undertaking comprehensive reforms in the tax structure, both direct and indirect, so as to improve its efficiency and equity. Distortions within the tax structure have been reduced by expanding the tax base and moderating the tax rates, he said, while noting that personal income tax rates have been rationalised by way of hiking the threshold limit and adjusting the tax slabs to provide relief to taxpayers.

In this regard, Mr. Mukherjee listed an 11-point policy perspective that the new government should put in place in the medium term while formulating the tax and expenditure policies for 2009-10.

Among the major initiatives, Mr. Mukherjee said the new government should pursue macro-economic policies to sustain a growth rate of at least 9 per cent per annum over an extended period of time; strengthen the mechanism for inclusive growth for creating about 12 million new work opportunities per annum; reduce the proportion of people living below poverty line to less than half from current levels by 2014; ensure that agriculture continues to grow at an annual rate of at least 4 per cent; and bridge the infrastructure gap by increasing the investment in infrastructure to more than 9 per cent of the GDP by 2014.

The Minister also highlighted the need for supporting Indian industry to meet the challenge of global competition and sustain the growth momentum in exports as also strengthen the economic regulatory framework in the country.