The Income Tax Department seems to be changing with the government deciding to opt for a consultative process for formulating the rules for the proposed Direct Taxes Code. In an interview, Revenue Secretary Sunil Mitra tells Vrishti Beniwal and Sidhartha that the idea is to make the tax policy ssimple and transparent to increase compliance. Excerpts:
The DTC Bill tabled in Parliament is quite different from the first draft. Why were the original proposals dropped?
The first draft was put in the public domain last year. We received 1,600 comments from stakeholders. It is in the context of those comments we had to revisit some of our proposals. From these comments the feeling we got was that perhaps the stakeholders, who were actually going to pay taxes, were not yet ready to accept some of the proposals, particularly MAT on gross assets, shift from the exempt-exempt-exempt (EEE) system to exempt-exempt-tax (EET) and capital gains. If you want to create legislation through a participative process, it makes little sense to collect a lot of comments and not take cognizance of that.
Would you call it populism or pragmatism?
It is certainly not populism. If it was populism, then we might have further revisited rates on personal income tax. One has to be pragmatic; one has to balance what people are ready to do with the measures that you seek to achieve. You want people to be paying taxes under these provisions. The more imposition we do, the more the litigation and the more the need for interpretation.
But what has essentially changed in the DTC apart from a few areas like GAAR and CFC which were not there in the Income Tax Act? Broadly it remains the same.
I do not agree with that. Section 10 of the Income Tax Act lists the persons whose incomes are exempt as well as the nature of income which are exempt. This Section contains more than 50 sub-sections and some of these are further divided into sub-clauses. One has to read 60 pages to figure out whether his income is exempted or not. The Act was created in 1961 to tax income of four or five types. But with the socio-economic and political changes in the last 50 years, our fiscal policy was played around with to promote certain sectors. To provide for exemptions was not the intention of the Act. It was necessary to replace it with a structure that could remain in place for the next 50 years. DTC was proposed for this purpose and not for moderating taxes.
So, you have essentially cleaned up the legislation.
We have restored the structure of the legislation is the right word. One more thing is that DTC has committed to remove all surcharges and cesses. Very few governments have taken this step because a surcharge or a cess in a federal structure is Centre’s money and there is no need to share it with the states. The fact that we are giving this up is making things much more transparent.
But tax reforms have been put on the backburner as exemptions still remain?
Apart from some savings, retirement benefits and the infrastructure sector most exemptions have gone or will go. Last year’s revenue forgone in direct taxes was Rs 80,000 crore. Only Rs 25,000 crore was towards advance depreciation. That will remain even if I give investment-linked deduction. So, Rs 55,000 crore is outside my tax pool only because of exemptions given to the industry, including special economic zones. One particular investor in a sector where profit-linked exemptions were allowed has claimed an expenditure of Rs 91 crore and he has taken a deduction of profit which is 1,010 per cent of that investment.
Do you have a timeframe in mind for phasing out exemptions on savings?
The idea is to encourage long-term savings. We have not proposed any timeframe for that. Everything will depend upon how the economy does. It seems to be on a roll now. If it is sustained in coming years, maybe we will relook at it.
o you think the changes brought in the DTC Bill to address the concerns of the industry would help increase compliance?
That is the objective. When you tax income, you can never please everybody. As long as you are pleasing the larger section of the society, you can expect better compliance.
What is the progress on the Goods and Services Tax (GST)?
The government has requested the empowered committee of state finance ministers that by September 20 it should let us have the coordinated view of the states on the suggested Constitutional amendments.
The rollout date of DTC has been deferred to 2012. Would you extend the deadline for GST also?
Postponing the DTC deadline was a conscious decision. It has nothing to do with GST. Ideally, I would have been more comfortable if both the legislations had taken effect together because GST will have a very strong impact on increasing the taxpayer base. We delayed the DTC rollout deadline because we wanted to give people more time to adapt to a new law. Moreover, we need time to write all subordinate legislation. Even this will be put in the public domain for comments and only after that we will finalise it.
Does it also hold true for the preparedness on GST?
For GST, work on IT systems is in progress. We have not slowed down.
So, are you confident of meeting the deadline?
You are not going to get GST by April 2011, but we are working towards completing our systems by then. Registration, returns and payments is all that needs to work to begin with. We are not giving up hope.
Is there a possibility of implementing it in the middle of the year?
Yes. If we can do it from October, or June, why not?
Do you expect to surpass the total tax collection target this year?
Collections so far have been good, though there has been a slight moderation in July and August. But I am reasonably sure we should be able to meet the target. At the end of August, we are at 40 per cent of the Budget Estimates in indirect taxes, which is slightly higher.
Is service tax an area of concern given the increase in litigation on taxation of new services?
Surely, because service tax is a newer area of taxation. Services are contributing about 60 per cent of our GDP, but only 10 per cent of our tax is from services. We had expected that allowing the states to tax services in GST would have shown a larger increase in collections. There are lots of interpretation issues. So, the more the services are taxed, the faster these issues get resolved and collections will increase.
After Switzerland, are you close to concluding talks with other countries on tax treaties?
There is a huge movement on this front. Bermuda and Lithuania got cleared in the last Cabinet. We have Isle of Man, Jersey, Malta, Zambia and many others at advanced stages. In many of these, Cabinet note has already been prepared.
