Shome's priority: Tax base must be widened

High income sectors to be be included in tax net.

With the non-interest component of expenditure going down over the last few years, the government would have to widen the tax base in order to achieve the objectives set out in the Fiscal Responsibility and Budget Management (FRBM) Act, said Parthasarthy Shome, economic adviser to Finance Minister P Chidambaram.

Speaking to Business Standard today, Shome said the FRBM Act had laid out a road map for the government and it was clear that the onus would be on widening the tax base and including more taxpayers and economic activities in the tax net.

While bringing in areas such as agricultural income in the tax net was not feasible because farming was widely dispersed in the country, Shome said some high-paying agricultural activities could be taxed.

"The task force on taxes for the Tenth Five-Year Plan was of the view that agricultural income in India did not appear to have too high a potential from the point of view of taxation. But, irrespective of this, all high-income sectors should be taxed," he said. Shome, however, empahsised that he did not favour increasing tax rates.

"Tax rates have an in-built inflexibility and, beyond a point, they encourage tax evasion," he said, adding that the rationalisation of the tax structure undertaken by Chidambaram in 1997-98 had been continued by successive governments.

"There is a common critical mass of understanding and support with regard to tax reform," he said.

Asked if he favoured the introduction of a general sales tax on both goods and services mooted by his predecessor Vijay Kelkar, Shome said he was optimistic about the value-added tax (VAT).

He added that since VAT would cover consumption of all products, the issue of taxation of sectors such as agriculture would be automatically addressed as it would come into the tax net not through income but through consumption.