Thursday, May 5 2005 14:49 Hrs (IST) - World Time -

New Delhi: Government today (May 5, 2005) asserted a major clean up of direct taxes has been carried out in the Finance Bill, which has continued with the reform of indirect taxes and expansion of service tax.

"A major clean up of direct taxes has been done. We have continued with the reform of indirect taxes and expansion of service tax," Finance Minister P Chidambaram said moving the Finance Bill, 2005 in the Rajya Sabha.

Giving the philosophy behind tax proposals in the Finance Bill, Chidambaram said that the Government has adopted some important recommendations of the Kelkar Panel in a bid to fulfil the twin objective of raising revenue and encouraging savings.

On service tax, he said that as service sector accounted for 52 per cent of GDP, it was only appropriate people got used to paying tax for services rendered just as they pay excise duty on goods.

The endeavour would, therefore, be to try and bring more and more services into the tax net, Chidambaram said.

Government garnered Rs 14,000 crore from service tax in 2003-04, which is quite small considering that more than half of the GDP accounted for this sector, he said.

On indirect taxes, Chidambaram said the bill has attempted to correct the inverted pyramid duty structure in most cases.

"This anomaly still continues in a few items. As they being historical baggage, this cannot be corrected overnight."

Chidambaram said that the Government has corrected anomalies through official amendments in the Finance Bill by raising the Income tax exemption limit for women to Rs 1,35,000 and for senior citizens to Rs 1,85,000.

He said that there was a "misconception" that senior citizens do not save. A study conducted by Kelkar Panel indicated otherwise, Chidambaram said adding the clamouring for nine per cent bond for senior citizens showed they saved.

He said that the incidence of service tax, whose rate has been retained at 10 per cent, was much less at 6-7 per cent as it has been made modvatable.

P.G. Narayanan, All India Anna Dravida Munnetra Kazhagam (AIADMK), who initiated the discussion on the Bill, urged the Finance Minister "not to play politics" and expedite the promised financial allocation to proposed desalination plant for Chennai to tackle drinking water problem in the city.

He said that the Twelfth Finance Commission's recommendations appear to penalise the efficient and better-managed States like Tamil Nadu and reward inefficient States.

It was time that it came out of the beaten path of helping only backward States, he said adding devolution from central pool of taxes has to be raised from 30.5 per cent, recommended by the Finance Commission, to 50 per cent.

In this connection, both Bharatiya Janata Party (BJP) and Congress had "hidden agenda" in not to devolve more resources to States, the ember said.

On VAT, he said that Tamil Nadu would implement only where here was consensus among all stakeholders in the State and alleged the Centre's compensation formula for loss of revenue due to the switchover was faulty and needed to be improved.