Remove distortions in tax structure for corporates, rationalise exemptions

Written by fe Bureau | New Delhi | Updated: Jul 10 2014, 07:36am hrs
The Economic Survey has made a set of bold suggestions on taxation, including removal of all bad taxes like cesses, surcharges, taxes on transactions and dividend distribution as well as tax inducements given to corporations and individuals that distort their decision making. It also proposed that India lower its corporate tax rate of 30% towards the median of the rates followed by all emerging markets to attract investments.

The policy document brought out by the Economic Division in the finance ministry made a strong case for removal of a large number of cesses and exemptions that favour special interest groups and said the tax policy need not further the industrial policy.

Uneven and high tax rates and, uneven tax treatment of similar economic activities, have induced distortions in the behaviour of firms and households, said the survey. The tax system must, therefore, move away from industrial policy with incentives for one activity or another, towards a simple framework, it said.

Low tax rates on a broad swathe of the population is what the survey's recommends to finance minister Arun Jaitley. The survey proposed withdrawal or rationalisation of tax exemptions, caution while signing free-trade agreements and review of the customs duty regime to address the falling amount of duties collected from specified items against their overall value of imports.

The survey proposed simplification of the income-tax law by way of a Direct Taxes Code with a 'clean conceptual core'. "The DTC is required as a clean modern replacement for the existing income tax law, it said.

The survey also revived an earlier plan of the finance ministry to have a Central Goods and Services Tax (GST), combining excise duty and service tax, as a precursor to a full-fledged unified indirect tax regime. Once CenGST is implemented and the information technology system for it has worked, (revenue) estimation risk will be lower and it will be easier for the Centre and the states to move to GST, said the report.

The survey, which criticised the tax administration for imposing legal risks and compliance costs, also made a strong case for tax reforms to promote efficiency and productivity growth.