The revenue collection targets for next year will depend on the goods and services tax (GST) to a great extent. Will GST buoyancy improve?
It will depend on compliance improving under GST. With features like e-way bill and invoice matching coming back, there will be buoyancy in tax collections. Once a panel that is looking into invoice matching is ready with its recommendations, the GST Council will take it forward.
But the e-way bill has been deferred because of technological glitches…
Yes, there were technological glitches and we decided not to cause inconvenience to the trade because of that. We have decided to continue with the trial period for some more time. Once we are sure that the system is efficient and e-way bills can be generated within 1 minute, we will make e-way bills compulsory. We will try to bring it in as quickly as possible.
Will we see many legal changes in the GST framework?
Changes have to be made in the central GST law, state GST law and the integrated GST law. We are hoping to bring the bills in the second half of the budget session beginning March.
What was the guiding principle for the budget for the next fiscal year?
The guiding principle was not to compromise on rejuvenating the rural economy and not to compromise on social security, health and education. Besides, we did not want to be very populist and please everyone with tax cuts.
We have seen a progressive rate reduction in corporate tax rates, but what about personal income-tax rates? Won’t a cut in personal income tax rates boost consumption?
Not really. Instead of reducing the rate of income tax, it is always a good idea to boost the economy through spending in rural areas where immediately there will be consumption demand. So we decided to boost demand.
There are not many anti-black money measures in the budget. Has the fight against black money taken a back seat?
Not at all. As the finance minister mentioned, because of anti-black money measures, direct taxes have seen very good buoyancy resulting in a bonanza of Rs90,000 crore in two years. Benefit of demonetization will continue for the next two-three years as notices sent out to depositors will lead to some traction. More taxpayers will get added.
Was it a conscious decision not to respond to the US corporate tax cuts by reducing corporate tax rate to 25% for all companies?
We had a simple calculation. The argument of Indian industry is that if the 25% rate applies to all companies, then they will have investible surplus and they can set up new manufacturing units. The cost to the exchequer of giving the benefit to all the companies was ₹ 0,000 crore. This would benefit the shareholders of the companies and we don’t know if the companies will necessarily invest. And investment is not a function of tax rates alone. It is also a function of demand in the economy. So shouldn’t the priority be to generate demand? That’s a call we took that the ₹ 60,000 crore should be given for rural rejuvenation.
For new investment, we have already allowed a 25% corporate tax rate. The cost of an across-the-board tax rate reduction to 25% from 30% is Rs60,000 crore. Such an across-the-board tax cut will mostly benefit shareholders, but we do not know if it will necessarily result in investments in rural areas as investment is not a function of tax cuts, it is of demand in the economy. When there is demand, investments will come no matter the tax rate. Should our priority be to create investible surplus in the hands of shareholders and expect them to invest or generate the demand so that there is incentive for investment? People say they are not investing as they are waiting for demand. Unless the capacity utilization industry maximizes, businesses will not invest. We have to take a conscious call on our priorities.
American companies like Apple Inc. have responded quickly to the sharp 14 percentage point corporate tax rate cut announced as part of the tax reform there. Your comments.
In the case of new manufacturing companies, the tax rate is already 25%. In any case, the effective corporate tax rate on big companies with more than Rs500 crore sales is 24% as they are claiming exemptions.
Finance Bill 2018 seeks to expand taxation of the digital economy by tapping offshore firms that have a ‘significant economic presence’ in India. How will you go about this?
It is an enabling provision. There is no intent to tax anyone at present on account of their “significant economic presence". This concept is there in the base erosion and profit shifting initiative of the Organisation for Economic Co-operation and Development. The idea is that if we incorporate it in our domestic tax law, we could get our tax treaties amended. (Investments from offshore companies get protection from tax treaties between India and their home countries and the treaties at the moment do not enable taxation based on significant economic presence). We can renegotiate the treaties and introduce such tax measures, but at the moment it is an enabling provision.
Do you have any particular countries in mind for treaty renegotiation?
We could do it with major countries, the companies from which have significant economic presence in India.
The tax department now has access to large amounts of data. How is this helping?
Tax department possessing information about economic activities itself is a deterrent to tax evasion. Compliance will happen without even us matching the database of direct and indirect tax administrations.
Any rethink on the introduction of the long-term capital gains tax on equities?
The Rs1 lakh threshold for long-term capital gains taxation, which is over and above the income tax threshold of Rs2.5 lakh, is very generous.