We are looking at a regime where exemptions and deductions, unless extremely critical, will not be entertained.
To the extent possible, wherever sunset clauses are coming in, they would be allowed to lapse.
On the corporate side, on fringe (benefit tax), things which are not contributing... a very hard look could be given to discontinue.
On the personal side, in terms of rate, the finance minister could consider lowering tax by a few percentage points, particularly in the lower slab.
Clearly, I feel that there is an expectation that the slabs we have, is reached rather rapidly and we should expand the slab. The slab in the minimum rate, 10% and 20%, could be expanded. Could the initial slab be increased to a much larger extent?
I see discontinuation of exemptions of all kinds, which will overwhelm subjects like this (extra tax benefits to incentivize long-term savings).
Secondly, I think there is a realization that tax should not create distortion in various financial instruments. Let it be market-driven and let tax not play a role in discriminating among various instruments.
I think it is unlikely that something significant should happen in creating a class of savings.
At the same time, since we have a critical need for infrastructure, I would not be surprised if something to take care of infrastructure is carved out to be incentivized.
On trend in direct taxes
It is very clear we are seeing a buoyancy in tax revenues; it is contributed by two factors: widening and deepening of the tax base. What’s happened in the recent past are three developments.
One, the levy of service taxes and bringing people into the net.
Second, the implementation of value-added tax (VAT). If anybody drops out, the other guy cannot get the credit. People can’t live with asymmetry in the chain.
Third, of course, is the realization that tax as a cost is a good cost. It is rather an investment.
What I clearly see is that this is being realized and changing the mindset of even family-owned businesses, who are not necessarily looking at an IPO (initial public offering), but are looking at private equity investments. Therefore, tax saving versus tax avoidance is taking a back seat. Value creation is being realized more by complying with taxes and reporting true earnings. Therefore, the deepening of the tax base is taking place leading to buoyancy of revenue.
On future reforms
The head tax rate could be 43-45% (in India at present). But the effective tax rate is much less. Given the various deductions, the effective tax rate is not 40%.
There are two ways of tackling this. One is to reduce the head rate tax and say all exemptions go. But are we at a stage of maturity to go to that level?
Tax incentives per se would not make a difference (to an industry’s growth). I’m not sure if we are still at a maturity level where we don’t need to use tax as a tool to do development.
We need to keep that alive still for two reasons.
One, rate of return in India for any investment is skewed because of the taxes that accumulate into the system.
Till such time we move to a uniform GST system, our cascading effect of taxes is not fully neutralized. Unless it is neutralized, we would not be able to encourage investment in desirable sectors.
I see clearly there is a need to consolidate the taxes, just like indirect taxes. Direct taxes have become a patchwork. They need to be consolidated. To my mind, it would simplify things to a large extent without making changes in the basic tax structure.
You clearly see MAT (minimum alternate tax) is playing an important role. There was a time when there were many exclusions from MAT and each one of them is going phase by phase.
Now you see MAT virtually reconciles your book profit with your tax liability.
If you would look at the simplest regime, find out what is the tax neutral rate for MAT, and just have sections on MAT, you have a statute that is less than 10 pages. You have the experience of administering that, judicial understanding of that. You achieve a lot of congruence between accounting profits and book profits.