Finmin paper makes case for banking consolidation

The country8217;s burgeoning services sector, which accounted for more-than-half the GDP last fiscal...

The country8217;s burgeoning services sector, which accounted for more-than-half the GDP last fiscal, could get much-needed tax breaks. The finance ministry, in an October 2007 strategy paper on the services sector, has suggested substantially lowering tax rates for sectors like ports, shipping, air transport services, travel 038; tourism, telecom, and printing 038; publishing.

The paper, prepared by HAC Prasad, senior advisor to the finance ministry, suggests opening up sectors like insurance, healthcare, legal services, construction 038; engineering, education and consultancy services. The paper also favours consolidation in the domestic financial sector. Entitled 8216;Strategy for India8217;s Services Sector: Broad Contours8217;, the working paper is the first such report prepared by the finance ministry. It assumes significance as the Government has started preparatory work on Budget 2008-09.

The paper suggests that merging the core competencies of financial institutions FIs with those of commercial banks would foster consolidation in the banking sector, resulting in better and faster provision of financial services, cost reductions and improved competitiveness. It also favours opening up legal services to foreign players. Foreign direct investment is not permitted in legal services at present.

In order to improve transportation services, the paper recommends the rationalisation of taxes and duties. It says port charges in India are considerably higher than many other countries, which increases the landed price of goods and makes Indian exports relatively less competitive. 8220;There is need for rationalisation of port dues, examining the possibility of providing differentiated levels of tariff for different size of vessels or for different cargos,8221; the paper states.

To promote the exports of services, it also suggests providing appropriate export financing, extending specific dedicated lines of credit to sectors such as IT-related services, education 038; legal services and construction services. 8220;The need of the hour is to ensure proper financing at a reasonable rate,8221; said Vishwas Udgirkar, executive director, PricewaterhouseCoopers.