FM for 5% customs cut

Chidambaram exhorts states to go for VAT

Outlining the road map for furthering tax reforms, Finance Minister P Chidambaram today said the Centre proposed to reduce the peak customs duty rate by 5 per cent, move towards a central value-added tax rate and make the coverage of service tax more comprehensive.

In a presentation to state governments at the concluding day of the 51st National Development Council meeting, Chidambaram said states must expand their tax base, rationalise the tax regime, improve tax administration and focus on effective implementation of a modern VAT regime.

The Centre reduced the average Customs tariff to 15 per cent in this year's Budget. Further reduction in the tariff is in step with the objective of the government to align India's tariffs with Asean levels.

Emphasising the need to re-prioritise expenditure and augment public investment, the finance minister said subsidies and user charges should be rationalised and chronically loss-making public sector units should be sold or closed down.

"States' budgets must cease to be a safety net for the deficits of state electricity boards," he said in his presentation.

He pointed out that salaries and wages, pension, interest payments, subsidies and other current transfers pre-empted 110 per cent of the revenue receipts of the Centre and states in 2001.

Stating that fiscal consolidation was essential to avoid further fiscal deterioration, Chidambaram said states should match outlays with outcomes by specifying desired outcomes in quantitative terms with a time frame. He said the Centre would come out with an outcome budget in the first week of July and urged states to also do the same.

He said fiscal consolidation was also necessary to maintain a benign inflation and interest rate scenario to promote private investment.

The minister pointed out that in order to achieve 7.5 per cent growth in the GDP, investments had to increase from 26.3 per cent of the GDP in 2003-04 to at least 31.3 per cent of the GDP in 2008-09.

Chidambaram urged states to adopt the new pension scheme. So far nine states, including Himachal Pradesh, Tamil Nadu, Rajasthan, Andhra Pradesh, Manipur and Gujarat, have accepted the new pension scheme while Assam, Orissa, Kerala and Punjab are considering adopting it.

He also outlined the recommendations of the Vaidyanathan Committee for the revival of rural cooperative credit institutions.