Economic survey for overhauling tax system
New Delhi, July 7
The survey also underlined the need for implementing the Kelkar Committee recommendations on direct and indirect taxes, do away with the existing exemptions in indirect taxes and called for punitive measures to check evasion.
“There is a clear need to overhaul the regime of exemptions, reduce the number of notifications, simplify procedure and move towards a paperless and transparent administration, anchored on trust. It is equally important to establish a rigorous, penal and enforcement mechanism that takes care of those who violate the trust imposed, as is the practice in countries with low rates, simple tax laws and procedures”, it states.
The annual economic report card, placed in the Lok Sabha today on the eve of the presentation of the General Budget for this year, has identified five major challenges presently confronting the economy.
The deterioration in the finances of state governments has been sharper than that of the Central Government. All major fiscal indicators reveal a worsening of the fiscal situation as compared to the position of 1990-91.
— Sustaining the growth momentum and achieving an annual average growth of 7-8 per cent in the next five years.
— Containing annual inflation rate to medium single-digit level.
— Boosting agricultural growth through diversification and development of agro-processing.
— Expanding industry by at least 10 per cent.
— Effecting fiscal consolidation and eliminating revenue deficit.
“One of the most important challenges in the Indian economic policy consists of devising strategies for obtaining industrial growth in excess of 10 per cent”, it observed.
To this effect, the survey, which often carries undercurrents about policy announcements in the Budget, makes pointed remarks favouring further deregulation for growth of domestic industry.
Reservation for small-scale sector, high customs tariffs, rigidities in labour law, friction faced in creation and closure of firms and distortions in the structure of indirect taxes are among the five major constraints, which the survey has identified as impediments in industrial growth.
“The outlook for Indian industry appears bright if these impediments are removed”, it said.
Agriculture and allied sector registered a growth rate of 9.1 per cent in 2003-04, reflecting an increase in physical production and remunerative prices for agricultural goods. The growth rate of the sector for 2003-04 was one of the highest in recent years, and only marginally lower than the previous high of 9.6 per cent in 1996-97.
While the prospects for agricultural production in 2004-05 appears bright, the survey said a distinct bias in agricultural price support policies in favour of rice and wheat had distorted cropping pattern in input usage.
“A shift from the minimum support price (MSP) system and developing alternative product markets are essential for crop diversification and broad-based agricultural development”, it said.
The survey called for restraint in hiking the MSP of foodgrains till it equals the cost of production of the least cost states.
Moreover, more states should be persuaded to go in for the cost-effective decentralised procurement system, and “the proposal to announce a procurement price inclusive of 4 per cent state levies in lieu of the MSP, which is under consideration of the government, needs to be pursued”.
Drawing pointed attention to the serious threat posed to the sustainability of the food security system due to burgeoning subsidy which had touched Rs 25,160 crore in 2003-04, the pre-Budget survey has stressed that this issue needs to be addressed.
The survey notes that institutional projections of the GDP growth for 2004-05 vary from 6 per cent to 7.4 per cent. The real GDP growth is estimated to have gone up by 8.1 per cent in 2003-04, buoyed mainly by robust performance in the agricultural sector (9.1 per cent). Industry grew by 6.5 per cent and services clocked 8.4 per cent.
“The economy appears to be in a resilient mode in terms of growth, inflation, and balance of payments, a combination that offers large scope for consolidation of growth momentum with continued macroeconomic stability”, it said.
On customs duty, the peak rate of which was reduced to 20 per cent in the Interim budget, the survey said it should be gradually brought down to ASEAN levels.
It was also important to stick to the new deadline of April 1, 2005, for introduction of a comprehensive Value Added Taxation (VAT) regime.
The survey said implementation of VAT was important as the existing regime of internal trade taxes at the state level was distortionary in nature resulting in inefficiencies from cascading effects due to multiplicity of taxes.
Implementation of VAT and recommendations of the 12th Finance Commission would be critical determinants of fiscal improvement at the state level, the Economic Survey said.
In addition, it says that “any misguided scepticism about the resolve behind the declared goals of fiscal consolidation should be scotched by the bold actions”.
The survey expresses concern over the increasing food subsidy bill and states that “food management is inefficient with unsustainable level of subsidies imposing heavy burden on government finance”.
It has also called for a formulating fresh poverty alleviation programmes which are fiscally sustainable and better targetted.
“Safety nets should focus on those who either cannot participate in the growth process (for reasons of extreme deprivation or vulnerability, combined with poverty) or face continuing exposure to risks”, it said.