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The government relies on Parthasarathi Shome, adviser to the Finance Minister P Chidambaram, whenever there is difficult situation on tax front. After the government drew flak from industry for retrospective amendments to the I-T Act, it was Shome who salvaged the situation. Shome, who was the mind behind first Direct Taxes Code draft, tells Vrishti Beniwal that recommendation of a Parliament standing committee on raising threshold of income tax to Rs three lakh from current Rs two lakh a year need not be implemented at one go. On demand for raising customs duty on luxury goods, he cites the example of Chile which has one import duty and raises or reduces it according to the need of times. On GST, he says most technical points have been agreed upon and could be achieved at this point of time. Edited interview:
The DTC Bill is expected to be tabled in the Monsoon Session of Parliament and the question that first comes to mind is whether Finance Minister P Chidambaram would go back to his original bill, and also to what extent recommendations of the Standing Committee would be accepted?
We must recognise the process of DTC. In 2007-08, we worked on the draft code and Mr Chidambaram spent many a weekend in its formulation with us. It was put up on the web for public comments in 2009 (when Pranab Mukherjee was the Finance Minister) and, after incorporating industry feedback and the Income Tax Department’s views, DTC Bill 2010 was tabled in Parliament. The Standing Committee on Finance went through the Bill and gave detailed comments. Mr. Chidambaram returned as Finance Minister. He has looked at the 2010 Bill and Standing Committee recommendations, and wherever it was felt that some further changes are a must, those changes have been introduced, reflecting some of the earlier suggestions or even 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 rationalization under FM’s guidance.
Do you see merit in the Standing Committee’s recommendation of keeping the basic exemption limit at Rs 3 lakh compared to Rs two lakh at present, considering the limited fiscal space available 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?
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Would it be based on the original principle of minimum exemptions and rationalizing tax rates?
Yes. The best is to first provide a very broad base and low tax rates. But we know that we have to impulse certain sectors which can be leading economic growth. Many of the incentives earlier were profit-linked. Incentives, if at all they have to be provided, should be investment-linked incentives. That is one thing we would emphasize.
The tax department has received a lot of flak from industry and investors in the last few 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. Secondly, 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 taxpayers 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. I-T department has initiated a compliance cost study which is a big step forward. The Finance Minister also initiated a forum where different sectors will come and give us representations. Many have already asked to be represented.
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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. In order 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 import duty on some non-essential items could address CAD 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 Chile 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 last 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 one, 2014 now, but do you think things are ready to the extent that a new government can just go ahead and implement it?
Most of the technical elements of the structure of the GST have been agreed upon to the extent that they can be achieved at this point between the Centre and states. I won’t say that it is the most ideal structure of GST 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 prevalent in the world, that is, those that cover national and sub-national levels of government. In my view, the Finance Minister has agreed to technical demands that the states have made and I think the states see it that way also. 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 which are 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 them in the Constitutional Amendment bill itself, then 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 them 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 may 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.
