Pare down tax rates, economists tell FM

'Bring down combined central and state tax incidence to 20 %'

Leading economists today advised Finance Minister P Chidambaram to rationalise taxes in the forthcoming Budget.

Given the current buoyancy in revenue collections and the strong macro-economic situation, the economists, who met the finance minister for the customary pre-Budget interaction, said the time was ripe for undertaking a "mid-term" correction.

"There is robust economic growth and we are likely to achieve 9 per cent GDP growth. Revenue collections are buoyant and inflation is within control. This is the right time for mid-term corrections," DK Srivastava, director, Madras School of Economics, said.

Key recommendations by the economists included rationalising direct taxes and bringing down indirect taxes so that the combined central and state tax incidence could be brought down to around 20 per cent from the present 28.5 per cent, Srivastava told reporters after the meeting.

He added that in the medium term, the country could achieve 9-9.5 per cent growth considering that domestic savings rate was projected to rise from 34 per cent to 39 per cent.

The meeting was attended by Saumitra Choudhuri, economic adviser, ICRA Ltd, Rajiv Kumar, director and CEO, ICRIER, Nagesh Kumar, director-general, Research and Information System for Developing Countries, Subir Gokarn of Crisil Ltd, and Partho Mukhopadhyay of the Centre for Policy Research, among others.

"There is a need to give incentives for foreign institutional investment in infrastructure, besides for labour-intensive exports and R&D in major sectors," Nagesh Kumar said. He added the viability gap funding for infrastructure projects should be provided over time instead of being given as a one-time grant at the beginning of the project.

The economists said that government was expected to announce measures in the forthcoming Budget to enhance the country's competitiveness in the global economy. Enhanced budgetary support for irrigation, besides rationalisation of farm subsidies and a goods and service tax by 2009-10 were among other issues discussed at the meeting.

The economists wanted more attention to rural infrastructure, some reduction in the multiplicity of Customs duties along with a reduction of rates, and sorting out of regulatory and policy issues to accelerate infrastructure growth.

The discussions also centred on the unsatisfactory growth in excise collections. The economists felt that the buoyant growth in tax revenues beyond the budgeted amount should be utilised for cutting down the government's market borrowing programme.

Other measures proposed at the meeting included developing the debt market further, encouraging angel investors, giving a further boost to FDI inflows and amending the Banking Regulation Act to reduce the regulator's control.