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Major tax reforms expected in Budget
Gaurav Choudhury
Tribune News Service

Union Finance Minister P. Chidambaram arrives at his office in New Delhi on Sunday.
Union Finance Minister P. Chidambaram arrives at his office in New Delhi on Sunday. — Reuters photo

New Delhi, February 27
Finance Minister P. Chidambaram will present the first full budget of the UPA government tomorrow amidst expectations of announcements of major tax reforms even while keeping the farm sector at the epicentre of the new policy paradigm.

A special package, Bharat Nirman, primarily aimed at improving physical infrastructure in rural areas is expected to be unveiled. The scheme will address key issues afflicting the farm sector and would contain measures to increase investment in agriculture and irrigation sectors and seek to create a single national market for agricultural produce.

On the personal income tax front, while the slabs of 10 per cent, 20 per cent and 30 per cent are likely to remain unaltered, a marginal enhancement in the exemption limit is being considered. At present, any person with a maximum taxable income of Rs 1 lakh is not liable to pay any tax. The corporate income tax rate may also be reduced from the existing 35 per cent.

Mr Chidambaram is also expected to announce measures to further rationalise the existing customs duty structure to align India’s tariff regime with those of ASEAN countries.

The Budget is likely to contain measures to evolve a proper three-tier customs duty structure for raw materials, intermediate goods and finished products. The three tier customs duty is likely to be centred around the following parameters — lowest rates (possibly 5 per cent) for basic raw materials; middle run (possibly 10 per cent) for intermediates and peak rates (between 15 and 18 per cent) for finished goods.

The service tax net, which is presently applicable to 71 services, is expected to be widened and about 30 more services are likely to be brought under the net. This is one area where the government believes there is a large scope for widening the tax base. While services contribute about 51 per cent of the GDP, there contribution to indirect tax revenue is abysmally low.

The Budget is likely to contain measures to widen the tax base, particularly in areas such as real estate sector, where large incidence of tax evasion prevails. Sources indicated that the Budget might contain proposals to rein in the real estate sector by removing distortions in the stamp duty regime. This sector, sources said, had become a major breeding ground for tax evasion and criminal activities.

According to sources, the existing tax incentive scheme for small savings may be “rationalised”. At present, a wide range of tax exemptions are granted to personal income tax accesses under various government administered savings schemes. Exemptions are extended under various sections of the Income Tax Act such as Sections 88 and 80.

The government is also expected to set up a dedicated non-lapsable fund for public health projects through the imposition of a cess on health hazardous products such as cigarettes, tobacco and gutkha. Besides, a new public health mission may also be announced.

This will be in conformity with the promises made in the common minimum programme (CMP). The CMP has promised an increase in government spending in the health sector to two to three per cent of the GDP.

The budgetary allocation for the rural job scheme, as envisaged in the National Rural Employment Guarantee Bill, is expected to be in excess of Rs 15,000 crore. The Bill envisages that the government should provide to every poor household, whose adult members volunteer to do unskilled manual work, not less than 100 days of work in a financial year.

The Finance Minister is also expected to announce measures to rectify the rather convoluted duty structure of petroleum products where taxes account for around 50 per cent of the pump prices of diesel and petrol. The government may replace the ad valorem duty structure by a specific duty regime, which will be easy to administer.


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