The finance minister’s interview after presenting the Union Budget 2015
After finance minister Arun Jaitley presented his first full budget in Parliament on Saturday, he spoke in an interview to Lok Sabha TV. Edited excerpts:
There are many positives in this budget, but then there are voices in the Twitter world with people saying, ‘Is this a middle class budget?’ ‘Is it an Amartya Sen budget?’ Critics are saying that you have deferred your fiscal consolidation plan and, at the same time, announced an ambitious increase in central plan outlay. What is the central message of your budget?
When we inherited the economy, we got onto a moving train which was moving quite badly. We had to change the entire global attitude towards India, we had to clear the backlog of decisions and that’s what we’ve done and that’s what will give us positive results.
Even though it wasn’t an extraordinary year for the economy, it was a modest year.... We are likely to grow under the new series (for measuring the economy at market prices) by 7.4%. I think from here, the time for take-off comes. I think there are two major factors we must bear in mind.
The first is that the entire architecture of the centre-state financial relationship has been redefined. The states were getting 32% plus some extras, now they get 42% plus 5%. If you look at the all-India picture and calculate it, total national taxes centre collected, the state would get 49% and centre 51% till last year. This year it is 62% in favour of the states. This year, Indian states are financially more powerful. I think this is a great development because they are the ones who will spend the money on the ground. They are not to be seen just paying salaries and coming rushing to Delhi asking for more funds.
Now how do I make up for the loss of revenue? Therefore, next year we have to grow faster. If we grow on the projected growth rate of 8% plus, our revenue projection is about 15% plus. Last year’s projection was over-stated because 4.1% was the fiscal target set not by me but by Mr. (P.) Chidambaram, which I had adopted as in n year I couldn’t change it.
And, therefore, to reach 4.1%, what is the amount required? Only two ways you can meet the fiscal target; either earn more or spend less. Now we did a little of both. This year is my year and, therefore, I have to be transparent about every fact.
Now if my revenues go up by 15.9%, as we are projecting, I make up for the shortfall in the size of the centre’s stake by tax points. The secondary important factor is the other investment destinations, except the USA, is not doing particularly well and all competing economies are under stress themselves. The world can’t drive on one engine therefore we need multiple engines.
And everybody thinks it’s India’s chance to fly, if I may use the economics. Thus, there is a positive sentiment about us. What do we do in this positive sentiment? I can’t suddenly increase expenditure this year. The one fact we have noticed despite the positive sentiment, a legitimate comment on the ground, is infrastructure moving.
Look at the highways, the PPP (public-private partnership) model is not working. We have inherited the highways back. Mr. Vajpayee left behind a sector which was going to boom, instead you’ve got a very lethargic, underperforming sector. So everybody agrees you’ve got to put in public investment. We created a new model of this investment, which I think besides federalism is the second big point, I increased centre’s spend on infrastructure by ₹ 70,000 crore. This will have its impact.
I am now going to allow railways, highways and irrigation projects to raise money from tax-free bonds. And three, we earmarked separate funds, some I have just announced the contributions. PSUs (public-sector units) will also contribute. We start with ₹ 20,000 crore and government and state institutions will contribute. Your capacity to leverage private funds including international funds is going to be several times above.
The third big idea, when you say, the Amartya Sen approach. Well frankly, even if I want the economy to grow, I cannot be unconcerned about the poor people. And growing economies need to be concerned with social spending. So I’ve not compromised on the social sectors. We have just started on this idea. So between the middle classes and the poorer sections there is a common thread. The middle classes entirely pay for themselves. So I have allowed them a ₹ 50,000 annual deduction. Put your money in pension funds. So you pay less taxes and by the time you are 60-years-old you have a huge corpus. And I am told the NPS (New Pension Scheme) is giving an 11% return today. The money’s going to multiply several times. Even independently NPS is a great and safe investment; this money you spend will be used for a national cause.
As far as weaker sections are concerned, we have only given a glimpse. You pay ₹ 1 a month and you get an accident insurance of ₹ 2 lakh. You pay less than ₹ 1 a day, you get a life insurance of ₹ 2 lakh. And you pay a nominal amount of ₹ 250 a month during your earning life, you get a ₹ 5000 pension inherited by your spouse and children. This is partly contributory; partly the government will give budgetary support in the pension scheme we will give equal support for five years and then I am also cleaning up the unclaimed amounts. By legislation they will be transferred for SS (social sector) schemes. That’s the whole object.
The shadow of the 14th Finance Commission is all over your budget. There seems to be a new developmental ideology for this country in terms of resource-sharing is now based on devolution not grants, there is a greater incentive in your budget to create entrepreneurs. Can you elaborate a little on that?
See as far as devolution is concerned, I think discretions must end and therefore I will give to a particular state if it is a BJP (Bharatiya Janata Party) state or somebody else is a Congress state; I think this is a story of the past. Both by the finance commission and the budget, the non-NDA (National Democratic Alliance) states are greater beneficiaries because of the need to spend more in them.
The second is consistent with our philosophy of allowing manufacturing, professionalism, all this to grow, each of our revenue proposals is directed in that direction. Take a small example, most Indians are the best fund managers globally. They manage funds and they shift to Singapore immediately and manage funds out of Singapore because if the individual is in India, then the whole fund will be taxed in India. Isn’t there a need now to rationalize our law as far as that is concerned?
The IT sector, the technology coming in, isn’t it desirable to give them some customs rebate? Manufacturing sector, last year I corrected them, inverted duty structure, input cost will go up. Therefore we’ve corrected that aberration. As for the middle classes, I must say that there is an attempt by us even last year and this year. These are salaried people who pay income tax, they are the ones who struggle their entire life, to save a little money.
Do I or do I not put more money in their pocket? It increases spending, compelling them to save. Last year I said, I increase by ₹ 50,000 the housing loan deduction, I increased the savings by ₹ 50,000 crore. Now healthcare for instance, people must be a part of my social security programme. People should be incentivized to buy health insurance policies. In terms of illness, we know how much it costs now to get an unwell person treated. It’s just a brush with reality.
There were a lot of expectation from the Narendra Modi government. For every area including business area, the common man, farmers, how has this budget stood up to all the expectations?
I have always believed that there is hollow argument in this country that you are either on the side of the poor or on the side of the industry. I am on both sides. If I do not earn from industry, then how will I provide services for the poor. Hence, I do not think there is a conflict here, both these can walk hand-in-hand.
There are many problems for the industry, and foreign investors were also hesitating. Will this budget bring in a new cycle of investment?
If you look at the last nine months, without bringing any revolution, the state of taxation in this country, the investor used to look at it and you used to run far away from the country. We carried out the task of changing these in the last nine months. There is at least hope now that the laws of this country are impartial, and the taxation system of this country is not as bad as we thought. But there is still much improvement that needs to be done. Secondly, there is corruption in this country. We have done coal auctions, and the upcoming spectrum auction, we have proven that this country does not want this right. There is no need to pick-and choose anymore. So as I said in my budget speech, scam regimes are a thing of the past. And we said that we will bring laws to decide how these contracts will be issued. We do not want these rights either, the markets should decide in a transparent manner.
This budget’s most revolutionary suggestion, if you ask me, is that we will make a committee which will make a law and regulatory guidelines. The investor can start work, but if laws are violated then you will be stopped. This would be the biggest improvement, if implemented.
Is the taxation strategy getting impacted by the 14th finance commission?
I think on the question of wealth tax, lakhs of people are filing returns, they go and understate their jewellery from the jewellers, they do understate the value of properties in front of the real estate people, then they file a return. The whole energy of the department is spent on those lakhs of returns. Finally we end up getting ₹ 900 crore or ₹ 1,000 crore from the whole wealth tax and with all its attendant consequences. So it’s a very high cost tax with a very low yield.
I decided that tax on the super rich who can afford to pay it, increase the surcharge by 2% so we don’t want to favour the rich, the rich must pay a little more. I mean, by sacrificing 1,000, saving so much of governmental energy, eliminating corruption and harassment, and I end up collecting 9,000 instead of 1,000.
But the states lose out completely?
No. My idea was not to make the states suffer. When oil prices come down, how is that money to be shared? Eleven times we passed the benefit to the consumer. On one or two occasions, the oil companies have retained the benefit and they have retained it because they are suffering from inventory losses. You see, they buy at $80 and they are now selling at $60. So ₹ 30,000 crore was the inventory losses of the oil companies. After all, these are public companies, they can’t be made to suffer.
The third area is the money coming into the central revenue, either by excise or by tax. Now manufacturing revenues were low and therefore we needed to supplement our resources. We have to run a government. But this money, we now intend, should entire, a large part of it must go into the highways. It is a part of my priority on infrastructure. A little bit goes into railways.
Now who owns the highways or the railways? Is it the centre or the states? It is the people of India, these are trust organizations for the people of India. So if they are to be built out of my budget, nobody should grudge if I am spending money on these.
It is a middle-class budget. However, one of the biggest expectations from a middle-class budget is a little relief on the rates, a little relaxation. You have not done this. What is the reason behind this?
See, first you see that today, 3-3.75 crore people in this country pay income tax. In the taxation regime of any country, the number of taxpayers should increase. This is a challenge, it should not decrease. That is why, we should think whether we just wants the slabs to be increased, and slabs can be increased anytime, I have not ruled that out, but what fiscal space the government has, I will have to find it. And after giving so much money to the states, my fiscal space has shrunk. But by not increasing the slabs, I have compelled people to save. 36% should be the savings rate of this country, which has come to 29-30%. I want to take it back to 35-36%. I am giving people an incentive to save.
Second, if they save, they save for their future. Third, with their savings, this country will be built because all of this money will be spent in building the country. So if I let them go and spend and make this a consumption society, then in comparison to a consumption society, saving for the future and for building the country seemed like a better option to me.
You’ve brought these schemes to increase domestic savings. Most of our savings go in buying gold. The scheme you’ve introduced in this budget, how might this change the habit of buying gold and how can it reduce our imports?
If I have to speak in favour of the (erstwhile) wealth tax, then at least these non-productive assets would come forward although people would underestimate them. But this country has an attachment to gold. I have given three suggestions for this. First is that this gold, this will exclude jewellery items, those who have raw gold, you can monetize it, you can keep it in the bank, you will also get a nominal interest on this from the bank. Second is that you don’t buy gold. Buy gold bonds valued at the price of gold, which people put in savings. And as the rate in the market increases on the bond, you’ll receive profits. And the third is for what is called guineas or gold coins, they’re made in a foreign country, but they run here, are gifted on festivals, people gift them, people keep them at home as savings.
Then why shouldn’t we use the gold in the country to make gold coins with Ashok Chakra and the official stamp of the Indian government. And all of these that come (into the country) are either smuggled or without paying duty—so why shouldn’t it be legitimized. So, if we stop gold officially , then it comes through unofficial channels. This is a disease in this country. All households have a little bit of it (gold). And that is why I think that to make an unproductive asset into a productive asset is why we’ve tried to bring this (scheme) into the budget.
You have made a big announcement or a promise that you will reduce the corporate tax rate from 30% to 25% over a period of four years. And you also hinted at there will be pruning down of the exemptions. Is there a timeline on how you’ll go about it? It will create a lot of doubt in the corporate sector’s mind, how exemptions will be tackled.
I would have loved to do it this year. This would add to my seriousness that I mean business. I have to attract investment in this country. Not only international, even domestic. Now we have 30% plus surcharges etc.
Look at all the ASEAN countries. They average 21.9%. Our competing economies are almost 10% cheaper than us when it comes to the cost of tax. So, investors will ask why should I invest in India when I can get a cheaper facility elsewhere. It’s all competition and I lose out. My own investors are setting up units in other ASEAN countries because of their low rates of tax. So, I need investment to create jobs and to remove poverty.
So, I lose on two counts. First, my image is of a high taxing country, second, on account of these exemptions, what is actually 30%, I end up getting only 23% or less. So, in an ideal tax structure, you bring the rates down, make them globally competitive, but along with bringing it down, you phase out the exemption. Now, I don’t want to go back on the promise of what exemptions are there. There are some exemptions which have a sunset date. Those which don’t have a sunset date, we can phase them out easily.
But I didn’t do it this year because I didn’t want to take everybody by surprise, on one day saying it’s going.
We will have to start a programme for phasing out and phasing out since I’ve kept a four-year timetable - the phasing out can be in consonance with the reduction also. So I don’t want to profiteer out of this. I want to make India’s tax globally competitive because to attract investment. But, if something has to remain for a larger national interest, that’s a different matter.
The other advantage of this is going to be the taxman discretion will end. And the third advantage is bulk of the litigation on tax is on exemptions, and that litigation comes to an end. So we have a neater, cleaner, smarter tax system in the country.
On the black money part, since you already have a money laundering act and you have a FEMA (Foreign Exchange Management Act), why would you need to come up with a special act to tackle black money and how do you prevent misuse in terms of victimization of corporates or individuals?
First of all, the new law that I have announced is a law specific on foreign assets. If you are an Indian citizen, you keep money in a foreign bank illegally or you keep an asset outside the country illegally, it only applies to that case. It doesn’t apply to either legitimate cases, it’s also not a law that applies to domestic black money. We have other laws for domestic black money. Now for the purposes of money laundering act, the violation of Income Tax Act is not a predicate offence. So, if I say that to have a bank account abroad or an asset abroad illegally, it’s not a predicate offence. So we needed to put pressure on people as a disincentive.
When the law comes out you’ll notice that there will be a window under which you make a clean breast, because everybody has to make a disclosure now, pay the taxes, we’ll be charging you penalty, the percentages will all come out. And thereafter, you put an end to your sins. After that window closes, the prosecution chapter begins. Then if we catch anybody with monies abroad, then he’s going to be prosecuted, it won’t be a compoundable offence, it’ll be a deterrent punishment. And I think the manner in which, you see today disclosures are taking place by default. Somebody steals a document and leaks it out. And in each disclosure by default, you see an Indian present somewhere or the other, which means that it’s not a hallucination, it’s a hard reality. And this reality has to be changed.
Every law can be misused. Indian Penal Code can also be misused by filing an FIR (first information report) at a police station. Doesn’t mean you’ll repeal it. If there is a menace, you’ll have to have a strict penalty. Now if you see the kind of, the large number of people we mentioned on all these lists which have been unofficially circulating, simply disturbing.
On one hand, we’re bending backwards for making sure that people spend their money in India. If still you choose to have it, officially you are allowed, but if you want to do it illegally, then you must be prepared for the consequences.
You said that you’ll bring a scheme that would make for a tax amnesty. You didn’t use the word amnesty, but this kind of scheme, what will be its nature?
I didn’t say amnesty. When it comes to fore, it will be obvious that our intention is to get back the money parked outside. Because the account details that we’ve received are from 2006, so nobody waited till 2014, all the money has been taken out. So, what window we give or we don’t will be clear from it, the details will be in the new law.
Transcribed by Nikita Mehta, Apoorva, Shreeja Sen, Shreya Punj and Gaurav Mishra.
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