Budget To Focus On Reducing Tax Exemption, Manufacturing

The Narendra Modi-led National Democratic Alliance (NDA) government will try to phase out a large chunk of the Rs 2-lakh- crore tax exemptions that it gives out every year. However, the Union Budget 2016-17 may also offer exemptions to boost exports or increase investments in startups, finance ministry officials said.

"The focus of the Budget should be on tax rationalisation and simplification. The focus should be on promoting growth, employment and in terms of giving some sort of level playing field to domestic manufacturers so that the Make In India can happen," Revenue Secretary Hasmukh Adhia said.

His statement assumes significance as Finance Minister Arun Jaitley is getting ready to unveil 2016-17 Budget on February 29.

The tax department has already released a draft road map to phase out tax exemptions, and the final plan will be unveiled in the budget. While some exemptions will be dropped in this year's budget, others will be targeted in the next three years. The government will also reduce the rate of corporate taxation to 25 per cent from 30 per cent over this period of time.

"We cannot completely eliminate exemptions... If we are able to reduce the number of exemptions and the amount we are losing in exemptions, we would be in a better position to reduce taxation rates... Exemptions create inequity, it creates inequity between the existing unit and the new unit that is getting the exemption and it also creates inequity in terms of smaller companies and bigger companies," Adhia said. 

Removal of tax exemptions, Adhia said, would able the government to reduce income tax rate and give a more fair deal to people paying taxes.

"In direct tax, we are losing about Rs 1 lakh crore in these exemptions. The cause may be noble, but it distorts the taxation system. In case of indirect tax also, we are almost losing Rs 1 lakh crore (Rs 1 trillion) because of various exemptions given for SEZ, EOU."

Because of exemptions given to the corporate sector, the effective rate of taxation in India is 23 per cent, while the nominal rate of corporate tax is 30 per cent. The government is set to weed out a number of area-based and investment-based exemptions.

Adhia said removing the exemptions would also help to improve the tax to GDP ratio, which is currently around 10 per cent. "There is a need to increase the tax:GDP ratio but you also have to see the capacity of people to bear that kind of taxation burden. If we simply rationalise the taxation system and remove the exemptions, I am sure the tax to GDP ratio can be enhanced substantially," he said.

However, at the same time, new and some existing incentives will be allowed, indicated officials. The government may treat investments in start-ups on a par with the stock market. Currently, investments in start-ups attract short-term capital gains tax of 33 per cent and a long-term capital gains tax of 20 per cent. Investments in stocks have a short-term tax rate of 15 per cent and zero tax on long-term investments.

In order to attract foreign investment, Adhia said there was a need to do away with the multiplicity of central and state levies and the only solution to this is GST.

The goods and services tax will usher in an unified indirect tax regime, which will subsume various levies such as excise, service tax, sales tax and octroi.

So far this fiscal, corporate tax collection has not been impressive as earnings are not very robust. This has led to a growth in direct taxes of 11 per cent against a 33 per cent growth in indirect taxes, he said.

He said the shortfall in direct taxes to the tune of Rs 40,000 crore would be made up by robust collection in indirect taxes and the total tax collection target for the fiscal would be met for the first time in five years.

Adhia said the income tax department is trying to widen its tax base as 3.5 per cent of the total population pays the income tax. He said while about four crore people file I-T returns, for another about two crore people tax is deducted at source (TDS).

He said the tax department is making efforts to reduce litigations. At present, 3.4 lakh litigations are pending in direct taxes and another 1.36 lakh are pending in indirect taxes.

(Agencies)