Bursting kitty likely to leave taxpayers richer

Budget 2008 may unveil tax sops to help India weather a global economic downturn. After rewarding the taxpayer in the last Budget with a hike in exemption limit, thanks to rising tax collections and better compliance, the government may do an encore this year too. That���s because taxpayers have kept the cash registers ringing and direct tax mopup is set to outstrip collections from indirect taxes for the first time.

Budget 2007-08 pegged direct tax mopup at Rs 2,67,490 crore and indirect tax collections at Rs 2,79,190 crore. With an increase in tax compliance, direct tax collections may now cross the Rs 3,00,000-crore mark. The direct tax-GDP ratio, which was only 2.8% in 1995-96, improved to 5.6% in 2006-07 and is budgeted at 5.7% in 2007-08. The gross tax-GDP ratio is projected to increase to 11.8% in the current fiscal.

While the government can pat itself on the back for buoyant revenues that give it more elbow room to spend, taxpayers have reason to be proud too, going by the Economic Survey. ���Rising income-tax collections and better tax compliance by individuals allowed the government to raise the basic exemption limit for all assessees from Rs 1,00,000 to Rs 1,10,000,��� the Survey says.

The direct tax-to-GDP ratio has seen an uptrend because of the reforms in income and corporate taxes that simplified the tax system and reduced exemptions and tax rates, thus providing incentives for better compliance. At the same time, indirect tax-to-GDP ratio has fallen because of reduction in Customs duties and increasing exemption in excise.

The writing on the wall for indirect taxes is clear as the government embarks on a major reform���the unified goods & services tax (GST), which is set to kick off in 2010. This will prevent double taxation and the cascading effect as it would provide for input tax credit at each stage. But the crucial element of the reform, the phasing out of central sales tax (CST), hinges on compensation to states.

The Survey, however, wants the government to remain vigilant on global cues. Any downturn in the global economy will have a bearing on India and could jeopardise the Centre���s revenue collections.