Tax rate cuts only after wider base: Shome

Corporate tax incentives and exemptions should be rationalised.

Parthsarthi Shome, adviser to Finance Minister P Chidambaram, called for the broadening of the tax base and stated that a reduction in the tax rates would be possible only if the existing incentives and exemptions were rationalised.

"The reduction in tax rates has to be complimented with a level playing field. I will ask industry chambers to come up with concrete suggestions on how we can reduce exemptions and incentives, simplify the tax policy and make tax administration more effective," Shome said at a seminar on tax policy organised by Federation of Indian Chambers of Commerce and Industries.

Stating that tax incentives were affecting efficient revenue allocation, Shome said several committees on taxes had listed as many as 207 incentives that were provided under the Income-Tax Act.

"It is very important to rationalise and streamline the tax incentive structure if funds are to be generated for infrastructure, environment and social relief. The industry needs to look beyond its own micro structure and give us a list of incentives that are not useful from the macro-economic perspective and which can be done away with," he said.

He said curtailing the fiscal deficit as required under the Fiscal Responsibility and Budget Management Act would have to include measures such as the introduction of Value-Added Tax, broadening the service tax, scaling up tax administration efforts and removing exemptions.

Shome said while tax rates had come down drastically over the last few years, the increase in tax revenue had not been commensurate because of the inability to increase the tax base.

The tax-GDP ratio had been declining in recent years, Shome said, adding that the fiscal drag had to be reduced in the taxation structure.

"There is room for reduction of corporate tax rate. The corporate tax rate in India is now at 35 per cent compared with 19-30 per cent in the UK, 30 per cent in Australia and 25 per cent in Brazil. In addition to the tax, corporates have to pay a 2.5 per cent surcharge and another 2 per cent on education cess. This pushes up the aggregate tax rate to about 36.6 per cent," he said.

Shome admitted the tax rate in India had remained the same for the last 6-7 years, while countries like Brazil had almost halved it to 25 per cent. Several Southeast Asian nations, including Hong Kong and Singapore, had also lowered it.

Referring to the introduction of VAT, Shome said that while the tax had been introduced in other countries at one go, in India, VAT was being imposed in stages and was so far limited only up to the manufacturing level. "I am aware that the private sector complains about physical controls. But once revenue become buoyant, the physical controls can be scaled back," he said.

Making a case of bringing in more services under the tax net, Shome said the Centre would hold discussions with states over the next three months to reach a decision on the sharing of service tax proceeds.

Shome said a lot of emphasis would be laid on the computerisation of tax administration. He noted that the number of tax payers who had registered had gone up from 20 million in the second half of the nineties to 30 million at present.

"This increase in registration must however translate to higher taxes to the exchequer," he asserted.