The Hindu Business Line : Pointers to overhaul of tax exemptions

IN a clear indication of the nature of tax reforms that may be announced by the Finance Minister, Mr P. Chidambaram, in his Budget speech on Thursday, the Economic Survey for 2003-04 has called for an overhaul of the regime of exemptions and implementation of a transparent tax administration that is anchored on trust.

With the tax-GDP ratio continuing to remain low, the Survey has stated that improvement in tax collections is crucial for fiscal consolidation.

The document has stressed the need to evolve innovative tax laws and procedures to augment tax revenues even as it made a case for the establishment of a rigorous penal and enforcement mechanism that would take care of those who violated the trust imposed.

The Survey has highlighted that the decline in tax-GDP ratio was "entirely on account of the decline in the ratio of indirect taxes to GDP".

It pointed out that the indirect tax-GDP ratio witnessed a sharp decline from 7.9 per cent in 1990-91(when economic reforms began) to 5.3 per cent in 2002-03.

In indirect taxes, the ratio of Customs duty to GDP halved from 3.6 per cent in 1990-91to 1.8 per cent in 2002-03.

The Survey goes on to highlight the sharp decline in `collection rates', especially when compared with 1990-91.

The collection rate for all commodity groups has come down to 15 per cent (provisional) in 2002-03 from a level of 47 per cent recorded in 1990-91.

A sharp decline in collection rates was noticed in the case of petroleum products, chemicals, paper and metals.

Simply put, collection rate is the ratio of realised import revenue to the value of a commodity. It broadly indicates the incidence of Customs duty and other levies that are not in the nature of protective tariffs such as special additional duty and countervailing duty on imports.

The collection rate captures not only the element of protection due to Customs duties but the incidence of other duties that are in the nature of offsets to mitigate the impact of domestic levies for which producers cannot avail of any credit.

Generally, the collection rate is higher than the basic Customs duty as the latter excludes other duties and levies.

Even as the Survey highlighted the sharp decline in `collection rates', it has advocated that the move towards gradually reducing Customs duty rates and aligning them with that of ASEAN countries should continue, as it will help domestic industry.

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