In line with government plans on tax reform to raise Tax-GDP ratio to 13.17 per cent by 2008-09 from 9.2 per cent in 2003-04, the Survey said, "Both Centre and states need to improve tax administration to have an impersonal and hassle free tax regime."

It, however, did not elaborate on gradual phasing out of tax exemptions but made a special reference to Kelkar Task Force recommendations that categorically suggested "widening tax base through removal of exemptions."

Kelkar panel had mooted raising Income Tax exemption limit to Rs 1,00,000 along with 20 per cent rate for income up to Rs 400,000 and 30 per cent for income beyond that.

The panel had also proposed cut in Corporate Tax rate to 30 per cent reduction in depreciation rate from 25 to 15 per cent, while proposing continuance of tax incentives for existing units but lifting it for new units.

Favouring stable tax rates, the survey said "higher tax revenues have to be realised not through increasing tax rates, but through innovative changes in policies, procedures, laws and dispute settlement mechanism." It suggested innovative ways and automatic collection of taxes at source by use of IT.

Economic Survey 2004-05: Complete Coverage

Taking cue from Kelkar panel's sugestion of a 3-tier customs rate of 5, 8 and 10 per cent, the survey said efforts to bring down customs duties to ASEAN level should continue.

"Progress towards aligning customs duties to ASEAN levels, which appears to have enhanced competitiveness of the economy and fuelled export growth, needs to continue," the survey tabled in Parliament said.

It also stressed on widening of tax base through increasing the share of service tax in tax revenues, removal of exemptions that do not conform to the established principles of tax policy and an enforcement mechanism that is non-discretionary, transparent and effective.

"The present tax system needs to be further simplified and streamlined," it said. On state-level taxes, the survey pitched for phasing out of Central Sales Tax for smooth implementation of Value Added Tax in states from April 2005.

"The introduction of VAT at the state level from April 1, 2005 will go a long way in removing the cascading effect of the extant sales tax regime," it said.

A phased rationalisation CST to remove tax on inter-state sales and integration of whole country into a common market and consolidation of all state level taxes into VAT can improve the financial health of states, it added.

In this context, it made a reference to the Kelkar panel's suggestion of an nationwide Goods and Service Tax on the basis of a "grand bargain with states, which will help in fostering a national common market.