Mr Chidambaram, don't cut direct tax rates in Budget

New Delhi: A day after industrialists pitched in for cuts in personal and corporate income tax rates in the next Budget, Finance Minister P Chidambaram on Wednesday received exactly a different suggestion from economists.

"Given the circumstances that there a number of fiscal stress points in the offing, like oil bonds, MSS, pay commission, it is not prudent to start thinking of reducing tax rates," Standard & Poor's Chief Economist (Asia-Pacific) Subir Gokaran said after pre-Budget consultations between P Chidambaram and economists.

ICRIER Director and Chief Executive Rajiv Kumar said the advice given to the Finance Minister was that both personal income tax and corporate tax rates should not be altered.

"Don't touch personal income tax, buoyant tax collections do not mean that you cut tax rates, but use the money to either improve infrastructure expenditure," Kumar said.

Economists' suggestions came just a day after India Inc called for a cut in direct tax rates as well as excise duties. That way, the Finance Minister got two different sets of advices on cuts in tax rates in the first two days of his consultations with the industry and economists.

However, Kumar suggested to rationalise excise duties whose incidence is very high, particularly in oil sector.

"You can also look at the tax composition of oil prices, it is 57 per cent. Why don't you bring that down. By cutting taxes you can give relief to customers and down stream oil companies," he said.

With rupee appreciation already making imports cheaper, Kumar suggested that customs duty rates should also be left untouched.

He advised the Finance Minister to impose tobin tax on foreign inflow to check rupee appreciation. Tobin tax is a levy on currency speculation to discourage volatile short-term trading and its destabilising effect on currency value.

Kumar suggested such a tax on inflow into equity market and real estate, but not in other sectors of the economy. Besides, steps should be taken to enhance absorptive capacity of the economy so that inflow of funds could be utilised, he said.