Need to revisit tax incentives, FM to Consultative Committee

New Delhi, Nov 10 (UNI) Finance Minister P Chidambaram today said there was need to prune tax incentives which will help meet Fiscal Responsibility and Budget Management (FRBM) targets and increase tax to GDP ratio.

The Finance Minister in his address here to a meeting of the Consultative Committee attached to his Ministry said a tax concession is introduced with a specific purpose.

However, it needs to be reviewed on a periodic basis with a view to improving fairness, transparency and efficiency of the tax system.

If a tax incentive is out of vogue and thus eliminated then it will help meet the priorities of the government and eliminate inefficient and inappropriate tax expenditures.

Opening the discussion on "Tax Expenditures of the Central Government", Mr Chidambaram said tax expenditures are forgone tax revenues attributable to provisions in the tax laws, which allow a special exclusion, exemption or deduction from taxes or provide a special credit, a preferential tax rate or defer tax liability.

The Minister said in order to achieve an equitable tax structure based on moderate rates and to generate adequate resources to fund spending on social and physical infrastructure, a "close, hard look at the present system of exemptions in favour of particular sections of taxpayers is absolutely essential".

The Finance Minister noted that India's Tax to GDP ratio is one of the lowest in the world. Central Tax to GDP ratio, measured using central gross taxes, peaked at 10.6 per cent in 1987-88, and dropped sharply to 8.3 per cent in 1998-99. It rose to 10.5 per cent in 2005-06; It was, hweover, still low and needs to be improved.

The Draft Approach Paper to the Eleventh Five Year Plan assumes tax to GDP ratio of 13 per cent by 2011-12. As the opportunities for raising additional resources through new taxes or higher tax rates may be limited, tax incentives, therefore, need to be pruned to achieve the targeted ratio as also to meet the targets set by FRBM Act for elimination of revenue deficit.

This will help in widening the tax base substantially and would also enable the Government to moderate the tax rates significantly and facilitate movement towards an integrated GST by 2010.

Mr Chidambaram said keeping in view the need to promote the social and regional development goals of the Government and the need to provide special incentives to targeted groups, tax expenditures may still be justified and on that account some exemptions may be required to be retained for a longer period than others.

Participating in the wide-ranging discussions, the Members of the Committee stressed upon the need to rationalise the tax structure to bring more people under the tax net.

The Members also expressed concern over farm-lands being used for SEZs.

Mr Chidambaram informed the members that it has been made mandatory for the State Governments to certify that the land provided for SEZs was not agricultural land.

The Members also endorsed the need to have a re-look at the existing tax incentives.

Mr Chidambaram asked the Members to co-operate in building a national consensus on the approach to be followed to achieve this objective.

The Meeting was attended by the Minister of State for Finance S S Palanimanickam, Mr Pawan Kumar Bansal and senior officers in the Ministry of Finance.

Members of the Committee who attended the Meeting included Dr C Krishnan, M Ramadass, R Prabhu, K V Thangka Balu, Jivabhai A Patel, Prahlad Joshi, D K Adikesavulu, Narsingrao H Suryawanshi, Tarit Baran Topdar, Pusp Jain, Tukaram G Gadakh, P C Thomas, Gireesh Kumar Sanghi, Harendra Singh Malik, Abani Roy, Bimal Jalan and Dr Mahendra Prasad.

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