Cut incidence of indirect tax

The mid-term appraisal (MTA) of the Tenth Five-Year Plan, makes a case for reducing the incidence of indirect taxation, which increases prices of goods in the country. It also suggests doing away with tax exemptions.

The financing of the Tenth Plan will depend on the Centre's ability to increase tax revenues, which will require a speedy removal of exemptions.

Taking into account the reduction in Customs duty, it warns that slippages in this area can compromise growth targets in the early years of the Eleventh Plan (2007-08 to 2011-12), a period during which the targets set by the Fiscal Responsibility and Budget Management Act will have to be met.

Lower growth will also mean that the unemployment rate, which has risen marginally in the period between 2001-03, will also not go down. Unless the economy achieves growth in the 8 per cent plus range, reducing unemployment will be difficult.

The MTA, to be considered tomorrow by the full Planning Commission, headed by Prime Minister Manmohan Singh, also makes a case for reducing the peak Customs duty rates, from 20 per cent to 10 per cent before 2007.

This is to address the design flaws in value-added tax (VAT) introduced in 20 states, and reduce the incidence of indirect tax rates to Asean levels of 10-12 per cent from the current level of about 30 per cent. The MTA will be taken up for discussion by the National Development Council at its meeting on April 29.

The combined incidence of central taxes and state VAT is around 30 per cent, and this will keep prices high and dampen demand, the draft MTA says, adding that the move towards a comprehensive central VAT needs to be hastened.

Among the flaws the MTA identifies in the VAT are that it does not extend to indirect taxes on goods (entry tax and octroi), which are, therefore, not reimbursable, and the concept of value-addition has been diluted by continuing with the distinction between inputs and final products.

It also calls for addressing the inverted duty structure""Customs rates on raw materials are higher than those on finished products, especially in the case of information technology products listed in the Information Technology Agreement, and products like colour televisions, refrigerators and air-conditioners under the Indo-Thailand free-trade agreement.