Eleventh Five Year Plan - of Planning Commission

infrastructure remained many notches below world
class at the end of the Tenth Five Year Plan. Problems
related to the availability and quality of electric power
as well as roads, railways, ports, and airports have been
highlighted in Chapter 1 of Volume I along with the
outline of the new strategies adopted in the Eleventh
Plan to tackle these problems.
Taxation
7.1.32 Tax policy is a very important determinant of
the investment climate. The rates of direct taxes determine
the structure of incentives to work, save, and invest,
while the level and structure of indirect taxes
influences the aggregate demand and thus the scale of
operations on the one hand and relative prices of different
goods and services on the other. Concerted efforts
to simplify the tax system, moderate the rates of
tax, and avoid cascading of taxes, which intensified
since the 1991–92 reforms and were continued during
the Tenth Five Year Plan, have improved the investment
climate. But more needs to done.
DIRECT TAXES
7.1.33 The rate of Corporate Tax has been brought
down to a level of 30%, which with surcharge and cess
amounts to a maximum marginal rate of 33.99%.
However, analysis has brought out two features of the
direct taxation in the country arising from the regime
of exemptions. First, the average effective rate of Corporate
Tax paid in 2005–06 was 17% or about half of
the statutory rate. Second, the range of incidence varied
from 11.7% to 32.5%.
7.1.34 Different effective rates of direct taxes can cause
misallocation of resources. Capital investment should
be driven by efficiency considerations rather than
by tax advantage. Withdrawal of industry-specific
concessions will make it possible to consider the introduction
of a flat rate without any exemptions.
The desirability of a flat rate stems from the fact that
it promises to introduce transparency and equity in
taxation of different economic activities, reduces the
incentive to evade or avoid tax, and minimizes
the use of discretion of tax authorities (regarding
eligibility for concessions). The Kelkar Task Force
on direct taxes had recommended a similar regime of
Corporate Tax at 25%.
Industry 147
INDIRECT TAXES
7.1.35 In indirect taxes great progress was made during
the Tenth Five Year Plan in reducing the cascading
effect of indirect taxes by the adoption of State VAT by
almost all the States and UTs. However, the rates of
indirect taxes in India remain among the highest in
the world. Most industrial products are subject to
Central value-added tax (CENVAT) on the manufactured
value, at an average of 16% and a State VAT at
a modal rate of 12.5% of retail value (though there are
a number of goods that are exempt from State VAT
and some are subject to lower rates of tax). At present
the incidence of CENVAT and State VAT together is
about 23%. In addition, States and local levels of
government levy such taxes as octroi or entry tax,
etc. The overall rate of indirect taxes compare
unfavourably with those prevailing in Association of
South-East Asian Nations countries, which are closer
to 10%–12%.
7.1.36 High taxes raise the final price of products, reducing
demand for specific products and dampening
aggregate demand. Lower taxes lead to an increase in
the aggregate demand, providing long-lasting incentive
to investment, simultaneously increasing employment
and incomes. If the buoyancy in tax collection
seen in the recent years continues, it will provide an
opportunity for making a beginning toward the
gradual reduction of the combined incidence of
CENVAT and State VAT.
INVERTED DUTY STRUCTURE
7.1.37 The customs duty in India on non-agricultural
products has come down drastically since 1991–92, and
during the past five years the peak duties (except for a
handful of products) have fallen from 30% to 10% ad
valorem (as on 1 March 2007). The vast majority of
manufacturing industries have withstood increased
competition from imports arising from the lowering
of customs duties. However, what is affecting them
adversely is the inverted duty structure arising from
elimination or reduction of duty on value-added products,
while higher duties apply on the raw material and
intermediate products. In some cases, inverted duties
are embedded in the Most-Favoured-Nation duties, as
in the cases of Information Technology (IT) products
and books. Although under the obligations of the