Relook at tax incentives on the cards, says FM

Outlining what may be the future direction of tax reforms, Finance Minister P Chidambaram today told the consultative committee on finance that the government planned to have a relook at the existing tax incentives, which would cost the exchequer Rs 1,00,147 crore this fiscal.

The minister felt that a "national consensus" should be built on continuation of such incentives in the changed circumstances "" the massive jump witnessed in tax collections.

Members of the committee, including MP's C Krishnan, M Ramadass, Prahlad Joshi, PC Thomas, Abani Roy, and Bimal Jalan endorsed the need to have a re-look at the issue.

Significantly, Chidambaram pointed out that the "opportunities for raising additional resources or higher tax rates might be limited."

Therefore, tax incentives needed to be pruned to achieve the targeted tax-GDP ratio (13 per cent by 2011-12), as also to meet the Fiscal Responsibility and Budget Management Act mandated target of 2009 for elimination of the revenue deficit.

"This will help in increasing the tax base substantially, enable the government to moderate the tax rate significantly, and facilitate movement towards an integrated goods and services tax by 2010," he added.

One suggestion mooted at the meeting was that direct tax incentives for promotion of scientific research and development, commitments to provide exemptions to certain international bodies, and exemptions for promotion of the welfare of armed service personnel were put in a separate category, while the other exemptions were pruned.

Those pruned could include major direct tax incentives such as exemptions for long-term capital gains, incentives for industrial development of backward areas, exemptions for charitable, religious and non-profit organisations and accelerated depreciation for capital investment.

A background note prepared for the meeting pointed out that even the draft approach paper to the 11th Five Year Plan had observed that incentive programmes available for the North-East, Jammu & Kashmir, Himachal Pradesh and Uttaranchal needed to be reviewed.

The draft paper observed that extension of exemptions to Himachal Pradesh and Uttaranchal had had an adverse impact on industrial investments elsewhere, including the North-East.

It suggested that consideration be given to restricting such incentives to hilly areas or to replace the incentives with special programmes for roadways and railways.

Even the task force on indirect taxes has suggested that in the long run exemptions should be restricted to life-saving goods, goods of security and strategic interest, goods for relief and charity purposes, international obligations, and small scale industries.