Stressing on the need to ?restructure the tax and expenditure policy in order to strengthen the automatic stabilisers? in the economy, the Economic Survey 2008-09 has called for long-pending tax reforms, including the timely implementation of the goods and services tax as well as removal of transaction taxes, cesses, surcharges and customs duty exemptions.
Admitting that ?revenue imperatives have led to the imposition of surcharges, cesses and a number of new taxes such as CTT, STT, FBT and DDT, which have partly reversed the move towards a simpler system,? the Survey tabled in Parliament on Thursday has stressed on the need to simplify the country?s direct tax regime.
In this regard, the Centre should ?review and phase out? the fringe benefit tax (FBT), securities transaction tax (STT) and the yet-to-be-notified commodities transaction tax (CTT) as well as cesses and surcharges. It has also impressed that states should be incentivised to do the same for stamp duty.
The Survey has also called for a rationalisation of the dividend distribution tax (DDT) ?to ensure full single taxation of returns to capital in the hands of the receiver (i.e. neither double taxation nor zero effective taxation).?
Introduced by the UPA in its last term, FBT and STT although high revenue earners, are largely unpopular taxes and industry has been repeatedly calling for their withdrawal. In fact, as reported by FE earlier, finance minister Pranab Mukherjee in the Union Budget on Monday is expected to announce the removal of FBT, a tax on employee perquisites, as it distorts the tax structure.
A road map for the phasing out STT may also feature in the Budget, although revenue considerations may mean that the tax is withdrawn later. In fact, in a year when tax collections were slowing down, FBT collections rose by 12.38% to Rs 7,997 crore in 2008-09, while STT, despite dipping by 37% brought in Rs 5,408 crore.
Hit by the economic slowdown, India Inc has also been making a case for withdrawing the 10% surcharge on corporate tax and individual assessees earning over Rs 10 lakh per annum. The Centre also levies a 3% education cess and also a cess of Rs 2 on per litre is levied on petrol and diesel to fund national highways, rural development and state roads.
?The Economic Survey has clearly emphasised on the need to remove the multiplicity of taxes and has pointed towards a maybe a single tax rate. At the same time, it seems to have ignored climate change in terms of tax incentives for carbon credits,? said Amitabh Singh, tax partner, Ernst and Young.
Meanwhile, the Survey has also recommended that the direct tax code should be introduced as it would result in a ?neutral corporate tax regime.? The code which is aimed at replacing the Income Tax Act, 1961 was finalised by former finance minister P Chidamabram but has been in the cold storage for over a year now.
The Survey has emphasised the Centre?s commitment to a timely introduction of the GST from next April despite the recent fracas by states like Tamil Nadu on issues of revenue loss and autonomy.
?In spite of the improvements made in the tax design and administration over the past few years, the systems at both central and state levels still remain complex. These deficiencies are the most glaring in the case of Cenvat and the service tax. The starting base for the Cenvat is narrow, and is being further eroded by a variety of area-specific, and conditional and unconditional exemptions. The introduction of GST would thus be opportune for deepening the reform process already underway,? the Survey noted.
Significantly, the Survey is silent on extending direct tax exemptions but has made a strong case for reviewing exemptions in the indirect tax regime ? something which may not be possible, given the political considerations and the current economic downturn. While recommending a review of customs duty exemptions and moving towards a uniform duty structure to eliminated inverted duties, even as it has noted that the service tax and Cenvat regime is complex because of ?the existence of exemptions and multiple rates.?
Engine of growth
•Need for long-pending tax reforms, including timely implementation of the goods & services tax
•Phase out all cesses and surcharges on taxes and securities transaction tax, FBT and introduce a new income tax code
•Timely introduction of the GST from next April despite the recent fracas by states on issues of revenue loss and autonomy
•Rationalising the dividend distribution tax so that dividend is taxed in the hands of receiver
•Introduction of direct tax code for a neutral corporate tax regime
