With very little scope left for hiking tax rates, the budget 2006-07 is likely to embark on a comprehensive plan to tone up tax administration to increase revenue mobilisation, even as it would work towards aligning import tariffs with ASEAN (Association of South East Asian Nations) levels.
"The major effort would now be to substantially improve tax administration," a senior government official told PTI, adding there was now very little scope to tinker with the rates as there was already a commitment to maintain stable tax rates.
In line with the recommendations of the Kelkar panel on tax reforms, the phasing out of some of unwanted exemptions would continue, he said but felt there was not much scope for large-scale removal of exemptions as many of them have already been done away with.
Thanks to the compulsions of coalition politics, the finance minister's hands are already tied down in removing exemptions especially those pertaining to exports and social sectors. All over the world, tax exemptions are given to make the industry competitive, the official said.
Regarding import tariffs, there is already commitment to bring them down further to align them with ASEAN levels and this would continue this year as well, the official said, adding the effort on excise duty would be to move towards single rate.
Now there are only two items automobile and soft drinks, which attract 8 per cent special additional duty. Last year itself, the auto industry had demanded withdrawal of this 8 per cent additional duty.
The toning up of tax administration would include utilisation of tax information network to check tax evasion in indirect taxes as well, besides tightening measures to make evasion and tax avoidance difficult.
Last year, the Budget came up with cash transaction tax to keep a trail on cash withdrawals in a bid to check black money and there could be some such device in indirect taxes as well to check excise duty evasion.
The process of rationalisation of export incentives will continue and the tax incentives have already been linked to foreign exchange earnings to check misuse of the schemes.
The government is said to lose as much as Rs 50,000 crore (Rs 500 billion) in tax revenue due to export incentives and a siezeable percentage is on account of the misuse of the schemes by exporters.
There were also indications that the service tax net would be widened further particularly with the possibility of the service tax collections expected to exceed the target of Rs 17,500 crore (Rs 175 billion) in 2005-06.
With service sector accounting for 52 per cent of GDP, there is ample scope for mobilising much more revenue from service tax. According to one estimate, it could go up to as high as Rs 40,000 crore (Rs 400 billion).
On the back of a little over 8.1 per cent GDP growth and near double digit growth in industry and services sectors in the first half of the current fiscal, revenue collections have been robust with gross tax collections up by little over 19 per cent at Rs 1,85,284 crore (Rs 1852.84 billion) till November.
While income taxes grew by 22 per cent so far this fiscal despite raising of slabs and exemption limit, customs duty was up by 20 per cent. Service tax collections too has been robust and was put at around Rs 16,500 crore (Rs 165 billion) till November this fiscal.
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