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Panel for lowering rate of standard deduction on personal income

BS Economy Bureau

The Parthasarathy Shome committee on Tax Policy and Tax Administration has asked for lowering of the rate of standard deduction on personal income tax to Rs 15,0000 in the next Budget and ensuring the same tax rates for services as applicable for goods.

The committee, which submitted its final report on Monday has also said that the state governments should draw up a common list of services that they will want to tax.

To allow a quick transition to broadbased dual system of value added taxation of services, the committee has suggested an interim method where the centre levies the tax and authorises the states to collect them. But CENVAT on goods and interstate VAT on interstate trade in services will have to be collected by the centre.

The report has said the rate structure for the VAT on services should be identical to those for goods to avoid distortions in producer and consumer decisions.

It adds that a destination based dual VAT structure must be introduced rapidly over the next five years to ensure that the tax GDP ratio increases by at least four per cent from the current nine per cent.

Shome said a higher tax GDP ratio is essential to find funds to finance the tenth plan, with a tentative real growth rate of nearly nine per cent. The committee was set up by the planning commission to decide on the way the country's tax policy should move in the current decade.

It was also supported by the finance ministry with the participation of officials from the revenue department in the membership of the committee.

The other major recommendations made by the report are for allowing CENVAT credit for both capital goods and other inputs in the year of purchase itself instead of staggering over two years, done by the Budget.

It has said the next Budget should carry forward the merger of all excise rates to two slabs of 16 and 32 per cent. The committee has said that even after reducing the non agro-customs duty to an average of 15 per cent in three years the rates will be higher than those of East Asian countries.

On direct taxes Shome has criticised the raising of standard deduction on income tax to Rs 30,000 as it has further eroded the tax base. He has also suggested that tax exemptions for charitable trusts should be restricted to donation based organisations only.

It has also recommended abolition of distribution tax on dividends and consequent harmonisation of corporate tax for foreign and domestic companies at the same level as the highest level of personal income tax.

It has also criticised the budget for raising the limit of interest deduction on borrowed capital for construction of houses from Rs 100,000 to Rs 150,000.

The committee has instead asked for scrapping the provision as it is "inconsistent with the matching principle of income determination".

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