Tax buoyancy should lead to lower incidence of CENVAT

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New Delhi, Dec 10 (UNI) The Eleventh Plan document makes a case for gradual reduction of the combined incidence of CENVAT and State VAT if the buoyancy in tax collections continues.

It also argues that withdrawal of industry specific concessions will make it possible to consider the introduction of a flat rate for direct taxes without any exemptions.

The Plan document is slated for discussion at the meeting of the National Development Council (NDC) here tomorrow, to be Chaired by Prime Minister Manmohan Singh. The document has been cleared by the Full Planning Commission and the Cabinet.

The document says high taxes raise the final price of products, reducing demand for specific products and dampening aggregate demand. Lower taxes lead to an increase in aggregate demand, providing long lasting incentive to investment, simultaneously increasing employment and incomes.

''If the buoyancy in tax collection seen in recent years continues, it will provide an opportunity for making a beggining towards gradual reduction of the combined incidence of CENVAT and State VAT,'' the document says.

It says the rate of indirect taxes in India remains among the highest in the world. Most industrial products are subject to CENVAT and State VAT at a modal rate of 12.5 per cent of retail value, though there are a number of goods that are exempt from State VAT and some are subject to lower rates of taxation.

At present the incidence of CENVAT and State VAT togther is about 23 per cent. In addition, State and local levels of government levy such taxes as octroi or entry tax.

It notes that overall rate of indirect taxes compares unfavourably with those prevailing in ASEAN countries, which are closer to 10 to 12 per cent.

Making a case for a flat rate of direct taxes, the document says the desirability of such a rate stems from the fact that such a rate promises to introduce transparency and equity in taxation of different economic actvities, reduces the incentive to evade and avoid and minimises the use of discretion of tax authorities, such as elgibility for concessions.

The document notes that the Kelkar Task Force had recomended a similar regime of Corporate Tax at 25 per cent.

The document says different effective rates of direct taxes can cause misallocation of resources. Capital investments should be driven by efficiency rather than by tax advantages, the Plan says.

It notes that the rate of Corporate tax has been brought down to a level of 30 per cent, which with surcharge and cess amounts to a maximum marginal rate of 33 per cent.

However, the Commission in an analysis of the direct tax structure notes two features arising from the regime of exemptions.

First, the average effective rate of Corporate tax paid in 2005-06 was 17 per cent, or about half of the statutory rate.

Second, the range of incidence varies from 11.7 per cent to 32.5 per cent.

UNI

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