The Hindu Business Line : Time to lower indirect taxes

Despite the winter chill in New Delhi, there is an air of spring in North Block, where the Finance Minister is preparing the Budget. Like many of his predecessors, Mr P. Chidambaram has to carry some pretty heavy baggage; the government’s subsidy burden is ballooning and he has to find ways to rein it in so that resources are available for social sector development in the last full year of the government’s current term. But unlike previous Finance Ministers, he has good news from the revenue deficit front. Personal income-tax collections grew 42.5 per cent and corporation tax 46.6 per cent in April-November 2007 over the same period last fiscal, the overall direct tax collection rising 44.9 per cent

When Mr Chidambaram presents his Budget end-February, he will be counting on the economy sustaining nine per cent growth and, by that token, assuring it of robust direct tax revenues. But this task will not be as easy as it was last fiscal. In 2008, triple-digit oil prices and sluggish infrastructure will tax the next round of growth heavily, impose additional costs and perhaps reduce the momentum somewhat. Government finances will be stretched by the Sixth Pay Commission, the costs of controlling capital inflows and, of course, those hardy perennials — oil, fertiliser and food subsidies. With elections a little over a year away, the options for subsidy cuts are limited by the absence of viable targeting mechanisms that can partially reduce the subsidy burden. Oil prices may rise a bit and perhaps the poor may be spared kerosene hikes, but the economy will bear the brunt of a general escalation in prices. In the event, the Finance Minister would do well to consider reducing indirect tax rates. He is justifiably proud of the efforts to reform the direct tax regime; now it is time for similar changes in indirect taxes. Barring Customs duties, where the peak rates have declined to 10 per cent and procedures simplified, the incidence of other indirect taxes, marks up manufacturing costs 25-30 per cent (if sales tax is included) compared with 15 per cent in China. It is the cumbersome nature of indirect taxes that encourages duty relief petitions and exemptions, both of which further distort the tax regime by favouring certain sectors.

The forthcoming Budget presents the Finance Minister an ideal opportunity to use indirect taxes to pre-empt a rise in overall costs instead of addressing the concerns of distressed enterprises on account of a weaker dollar or similar market-driven contingencies. Reducing Customs duties lowered costs and stoked demand; that lesson should serve the Finance Minister well when he devises his indirect tax proposals.

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