Overall, the economy is better poised than at any other point in the last six years with all the stability factors looking good. There is an unusually good opportunity for the government to take steps that will accelerate growth and boost it to 6 per cent now and more later.
The overall thrust of our reforms should be measures to stimulate demand, measures for encouraging private investment and capital formation, reduction in taxes to encourage consumer spending, cheap availability of development finance, legal changes to stimulate enterpreneurship and transparency in governance.
High tax rates affect the flow of capital across countries. Rate of corporate tax on companies need to be brought down from 35 per cent to 30 per cent immediately and then to 25 per cent in the next two to three years.
Since the time of License Raj was in practice, all entrepreneurs were in queue for getting the licences and there was per se no need of Investment Allowance to promote investment. Now with market forces in place and Indian industry suffering from a number of disabilities such as high labour cost, high cost of power and poor infrastructure, there is a strong case for re-introduction of investment allowance. The government may, if need be, withdraw the same, if the disabilities are taken care of.
It is the considered view of Ficci that the minimum alternative tax (MAT) has adversely affected the internal resource generation of the companies resulting in a severe blow to their plans of expansion and diversification and should be withdrawn.
Re-introduction of taxation of dividends this year in the hands of shareholders is a retrograde step and indicates a short-term view from the governments point of view. Most countries surveyed by Ficci are either fully exempt from paying tax on dividends or otherwise allow benefit of tax credit to avoid double taxation and this list includes Singapore, Malaysia, Mauritius, Italy, France and Germany. It would, therefore, be in fitness of things that the shareholders be exempted from dividend taxation and earlier position be restored.
Any further reduction in customs duty without proper study about the cost aspects of different industrial sectors would render Indian products uncompetitive in the domestic market vis-a-vis imported goods. Before reducing the peak tariff, there is a need to remove disabilities in the case of domestic industry. The disabilities in the case of Indian industry are labour, infrastructure, transaction cost, power, interest, taxes and duties and small scale reservation. What is important right now is to remove the anomalies in the duty structure. We must have three-tier duty structure lowest on raw material, slightly higher on intermediates and highest on finished products.
The phasing out of peak duty reduction must be done with a priority on raw materials and not on finished goods. Differential between duties on raw materials vis-a-vis finished goods must be essentially kept between 10 and 15 per cent. The desirable category differentials by and large should be basic raw materials 10-15 per cent; semi-finished goods 20 per cent; and finished goods 30 per cent.
Taxation of services and its integration with taxes on goods is necessary from the view point of fair distribution of tax burden among the different sectors. Ficci is of the view that all services should be covered under the service tax and exemptions should be confined to the public services, essential public utilities and merit goods.
The penal provisions for spurious products should be made more stringent. This will work as a deterrent and will go a long way to help contain the menace of spurious goods. Further, the scope of the same should be extended to shopkeepers, dealers etc. They should also be made subject to penal provisions.