Indian budget seen unveiling piecemeal tax reforms

Tuesday, 25 February 2003, 08:00 Hrs
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NEW DELHI: India's national budget for the fiscal year beginning April is likely to take a piecemeal approach to reforming the complex taxation structure in view of a flurry of state elections followed by the general election next year.

Experts say while the government may accept some of the recommendations of a high-powered task force that suggested simplifying the tax structure to boost revenue, it would not launch a sweeping overhaul due to political compulsions.

Finance Minister Jaswant Singh will present his annual fiscal package for 2003-04 in the Lok Sabha on Friday.

"I think the government will take a gradual approach to tax reforms. Not much of reform is likely to come this year in contentious sectors," said economist D.H. Pai Panandiker.

"While some of the suggestions of the task force may find place in the budget proposals, other tough issues like imposing a tax on agriculture income and ending tax breaks on housing loans would not be touched," Panandiker told IANS.

"As the government is gearing up for state elections and the general election, it would not take any decision that could alienate the huge middle class."

Prime Minister Atal Bihari Vajpayee's Bhartiya Janata Party, which heads the ruling coalition, is set to face crucial elections in nine states this year. The state elections will be followed by the parliamentary poll next year.

Hopes of major changes in tax policies in this year's budget gained ground after a panel suggested a slew of radical measures including lowering of corporate and personal tax to improve public finances and lift flagging growth.

The panel, headed by former International Monetary Fund official Vijay Kelkar, was set up around seven months ago to prepare a roadmap for initiating sweeping reforms in the country's complex taxation structure.

Some of the recommendations are likely to be part of the budget for 2003-04.

Economists say massive changes are needed on the taxation front to influence investment behaviour and boost government revenues to bridge a combined fiscal deficit of 11 percent of the gross domestic product.

"The budget will have to provide an integrated package of initiatives on the fiscal, financial and economic front in general," said Vinod Chandiok, president of the Indo-American Chamber of Commerce.

"This will result in more investment, both domestic and foreign, generate economic activity and employment in industry and agriculture and increase demand for and consumption of goods and services," he added.

One of the main issues under consideration for companies in this budget is lowering of tax rates. There have been rumblings for a while that corporate tax rates in India are among the highest in the world.

The Kelkar committee has suggested the removal of exemptions and deductions allowed under the Income Tax Act, and at the same time suggested a reduction in rates.

Currently, corporate tax rates stand at 36.75 percent for domestic and 42 percent for foreign companies after surcharge.

The committee has suggested that rates should be brought down to 30 percent for domestic and 35 percent for foreign companies. Analysts are looking for slow but steady movements on the lowering of tax rates front.

"A cut in corporate tax is overdue. Lowering of tax will result in more investment by companies and this will have a direct impact on the economic growth rate," said T.K. Bhaumik, an economist with the Confederation of Indian Industry (CII).

India's economic growth for 2002-03 is estimated at 4.4 percent, down from 5.6 in previous fiscal year, as a severe drought in some parts of the country dented agriculture output.

"This will also give a boost to the capital and primary market. A cut will also result in increased compliance and help widen the tax net. This will more than offset a dip in the total revenue collection."

Currently, only 25 million of the country's one billion population pay tax. Experts say lowering of tax rates coupled with improved administration can significantly increase the total taxpayers base.

Analysts say the budget could also bring more services under the tax net to widen the taxpayer base.

Apart from a cut in corporate tax rates, experts also expect abolition of five percent surcharge on personal tax.

The Kelkar committee has proposed that the maximum income tax rate, which has been substantially reduced from 56 percent to 31.5 percent in 2002-03, be further reduced to 30 percent in 2003-04.

Source: IANS
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