The government relies on Parthasarathi Shome, fiscal expert and advisor to Finance Minister P Chidambaram, to resolve any difficulty on the tax front. After it drew flak from industry for retrospective amendments to the Income Tax Act, it was Shome who salvaged the situation. The mind behind the first draft of the Direct Taxes Code (DTC), Shome talks to Vrishti Beniwal on this and other issues. Excerpts:
The DTC Bill is expected to be tabled in the monsoon session of Parliament. The question is whether the finance minister would go back to his original bill and also to what extent the recommendations of the standing committee (of Parliament on the subject) would be accepted?
We must recognise the process. In 2007-08, we worked on the draft code and Mr Chidambaram spent many a weekend in its formulation with us. It was put on the web for public comments in 2009 (when Pranab Mukherjee was finance minister) and, after incorporating industry feedback and the I-T department’s views, the DTC Bill, 2010, was tabled in Parliament.
The standing committee on finance (of Parliament) went through it and gave detailed comments. Mr Chidambaram (then) returned as FM.
He has looked at the 2010 Bill and standing committee recommendations; wherever it was felt further changes are a must, those have been introduced, reflecting some of the earlier suggestions or new ideas. But we cannot, of course, fundamentally go back to the original DTC draft.
What are those changes?
That process is not over yet. What I can indicate is that we have achieved some sharp rationalisation under the FM’s guidance.
Do you see merit in the standing committee’s recommendation of keeping the basic exemption limit at Rs 3 lakh (income in a year) as compared to Rs 2 lakh at present, considering the limited fiscal space with the government?
Some of these matters have to evolve over time, with different Finance Acts. How much has been inflation, how much you want to focus on those who are already paying, how many new taxpayers you want within the system, what is the rate of growth of the taxpayer base, how much can you administer over new taxpayers - all that has to be kept in mind.
On the flip side, if we raise the ceiling, we have to see what would be the revenue cost. In a country like India, reflecting our per capita GDP, we cannot just wish for leaving out huge numbers of people below the tax net.
The challenge is to make it simple for them to comply when they pay tax. For example, we could ask, if you just have salary and interest income, should you need to file a return, unless you make a refund claim?
Would it be based on the original principle of minimum exemptions and rationalising of tax rates?
Yes. The best is to first provide a very broad base and low tax rates. But we know that we have to give an impulse to certain sectors which can be leading economic growth. Many of the incentives earlier were profit-linked. Incentives, if at all these have to be provided, should be investment-linked. That is one thing we would emphasise.
The tax department has received a lot of flak from industry and investors in recent years. You have seen tax practices in other countries. Is there something wrong with our system?
It is common practice in many economies for revenue authorities to have continuing stakeholder consultations and surveys of taxpayers. Taxpayer satisfaction is a part of the matrix of key performance indicators of the tax administration.
Second, you need analysis on who are willing taxpayers, who are willing but need a push or handholding, who will avoid tax if given the opportunity, and who are evaders. So, you have to segment the payers and focus your resources rationally on evaders, avoiders and those who need help.
Finally, one needs to estimate on a regular basis the compliance cost of paying tax in general and of any discretionary tax change. This is called impact assessment of a change. The I-T department has initiated a compliance cost study, which is a big step forward. The FM also initiated a forum where different sectors will come and give us representations. Many have already asked to be represented.
There is so much pressure on field officers to meet targets despite an economic slowdown. At the same time, they have been asked to adopt a non-adversarial approach. How is that possible?
It’s not that irrespective of the economy, the Budget Estimate remains the same. There is a revision in the Revised Estimate, which reflects the state of the economy as the financial year progresses.
To meet the RE, extraordinary efforts are indeed made in the last quarter. We need to further finesse the revenue generation trajectory to reflect economic developments.
Do you think raising of import duty on some non-essential items could address the CAD (current account deficit) problem?
Chile has one rate of import duty and when there is a need, they increase or decrease the rate. Even a completely market-oriented economy like theirs’ changes its policy to meet the needs of the economy. Our import duty structure, on the whole, is still not as low as those in other countries.
However, we have drastically reduced the rates over the past 15-20 years. As a result Indian consumers now receive world-class products. It has taken a long, arduous effort to streamline our customs duty structure with the rest of the world.
GST doesn’t look possible from April 1, 2014. But are things ready to the extent that a new government (after the mid-year general election) can just go ahead and implement it?
Most of the technical elements of the GST structure have been agreed upon to the extent that they can be achieved at this point between the Centre and states.
I won’t say it is the ideal structure but if I compare it with Canada or Brazil, already India has come to a point which is not worse than those countries. In that sense, we are better than other fiscally-federal VATs or GSTs (value added taxes or goods & services taxes) prevalent in the world, that is those covering national and sub-national levels of government.
In my view, the FM has agreed to technical demands the states have made and I think the latter also see it that way. When he took over, he looked at a list of demands from the states and I can’t remember anything he has not agreed to.
However, there are certain items still outside the GST base that, ideally, should have been in. For example, petroleum was out when I returned to the ministry. That concerned me because so much of the needed information goes out of the GST system but now it will be in the base.
Tobacco and alcoholic products are still out and if we exclude these in the constitutional amendment Bill itself, it will be difficult to bring them in later. So, let us see where the Centre and states come out on that. Looking at it internationally, the usual practice is that you can keep them in.
You can keep a low VAT rate for these and then have higher selective excise rates, based on turnover. That would have been better because then you have information within the GST system on such products and also get additional revenue. Except for one or two lacunae such as these, the overall structure looks quite good.
After all, we should go into GST only if it helps improve business decisions. To me, this is more important than immediate revenue concerns. The priority should be, if we can make business decisions smooth, that will increase productivity and then you get more GDP and more revenue.
The constitution amendment Bill is being worked on intensively. Then, each state has to pass its own GST law. Some of it could be done by ordinance if states are willing. That process might take a little time but other than that, much has already been achieved. If it doesn’t come, then I would say it is for political economy reasons.