Rangarajan questions govt's subsidy policy

C Rangarajan, chairman of the economic advisory council to the prime minister, has called for revisiting subsidies, dividend distribution tax and tax exemptions.

"We are unwilling to relook at even those subsidies, which nobody would justify," Rangarajan said after releasing a book, Tax Systems and Tax Reforms in South and East Asia, in New Delhi on Wednesday.

Rangarajan, who headed a panel that recommended restricting sale of subsidised kerosene to below poverty line families only, however did not elaborate on the kind of subsidies he was referring to.

He said the relook at subsidies also becomes essential because these are the days of "big ticket" expenditure.

The former RBI Governor said the Centre must stick to the Fiscal Responsibility and Budgetary Management target of eliminating revenue deficit and reducing fiscal deficit to 3 per cent by 2008-09.

He said the target of reducing fiscal deficit as per FRBM Act seems to be easier than eliminating revenue deficit since not only percentage but also the absolute number of the latter is to be brought down to zero.

Rangarajan also said there is a need to revisit taxing dividend distribution at the hands of corporates instead of shareholders, but did not elaborate.

He also said various tax exemptions need to be looked at.

The finance ministry has sought public comments on removal of customs duty exemptions on 21 items like camera imported by accredited journalists and excise duty exemptions on 54 items like tooth powder, lantern, tyres and pressure cooker.

Rangarajan said a lot of homework is required to introduce Goods and Services Tax from April 1, 2010 as proposed in the Budget 2006-07.

He said any model on GST should take into account states' sensitivities on the issue as well as constitutional norms.

Currently, India has state-level value added tax system and GST would be the national-level VAT.

Empowered committee of state finance ministers is currently working on evolving a mechanism for sharing of service tax between Centre and states, which would provide a framework for future GST as well.