Sunil Mitra, revenue secretary, speaks about Direct Taxes Code Bill in Parliament, the proposed Goods and Services Tax and the question of these tax reforms being diluted, in an exclusive interview with Tanu Pandey and KG Narendranath.
There is a perception that while in the making, the two epochal tax reforms on the anvil?GST and DTC?have both got substantially diluted. This is despite innumerable commentaries that spoke of their virtue, if implemented in earnest. Would the final outcome be worth these discourses and the efforts made at the policymakers? level to push these reforms?
The objective of DTC was not to moderate rates, but of course, one of its purposes was to do away with certain exemptions. I do believe that we have done away with a lot of exemptions?apart from some on personal savings and a few retained for the infrastructure sector, where investment needs to be stimulated. The major reason for introducing DTC, however, is to bring about a structured Act relating to direct taxes. The Income Tax Act was brought in 1961, primarily to tax income. Over the years, it got amended over 3,000 times to factor in changing realities and consequent policy shifts. The complexity that has, therefore, crept into the law made it a tool in the hands of habitual litigants. Indian economy has grown at a faster pace in the last decade. The economy used to enjoy (or suffer?) significant amount of protectionism, but the recent years has been characterised by its rapid globalisation. So, the structure of the Act got more confused also because of its incongruity with the global practices. Since the income tax rates were not prescribed in the I-T Act, yearly finance Acts became instruments for such changes, creating a significant amount of anxiety and unpredictability about how these changes would be. DTC proposes to change this and introduce a greater amount of certainty to the whole affair.
One view is that unsettled tax rates may not be a bad thing given the uncertain global economic situation. Many countries including the US and EU continue to use tax as a policy tool and they indeed have done so during the recent crisis.
Our experience has been that a great deal of distortion has crept into the administration of the Income-tax Act. But leaving that aside, the more important thing is there have been over 3,000 amendments to the Act since its inception. Each year there is a finance bill that has made several amendments; additionally, there have been 34 amendment bills. So the structure (of the Act) no longer exists.
There is one view, which many experienced tax officials also share, that the new Act could in fact create a new series of suits. This is because over the last few decades, judicial pronouncements have helped settle the disputes concerning the extant law and the mass of litigation and also the scope for it have been considerably reduced. And an entirely new Act, despite its clarity, could cause a spurt of disputes.
No, we are not opening a Pandora?s box via the DTC.
You have a point that the existing Act has been subjected to a lot of judicial reviews. We have tried to retain (the spirit of) as many of these judicial pronouncement as we are familiar with. We cannot presume for the future but we have tried to take judicial views as much into account as we were able to. As I said, the objective of DTC is to restore the form (of the Act), to simplify it and use straightforward language. You may note that the DTC does not have a single provison, whereas the extant I-T Act has umpteen of them.
The idea is to create a structure that remains valid for the next 50 years or so. While the basic structure will remain, changes in the economic, social and political spheres would indeed get reflected in the Act from time to time, with minimal disturbance to the structure. This, I think, is the main function of DTC. Look at the stability that the DTC would bring as the tax rates are prescribed in the Act itself. This does not mean that (the rates) will not change as we go along, but they are nevertheless much more stable than now. This would help investors, boost savings and facilitate capital formation.
But you had spoken of the radical changes in the first draft like substantially lower corporate and income tax rates, minimum alternate tax (MAT) for corporates on their gross assets, and the proposal to tax savings at the withdrawal stage.
But here you must recognise that I know of no other legislation where the stakeholders were consulted so intently before the draft is finalised. So we have to take the taxpayers’ opinion on board. I mean we want to increase compliance and this is possible only with taxpayers’ cooperation. We don’t want to amplify the enforcement action. There was a howl of protest from the corporate world (on the proposal for levying MAT on gross assets), from the people who are going to lose their savings etc. One could barely ignore them without a cost. When we make certain import changes (like retaining the practice of computing MAT with reference to book profits and the EEE method for taxation of savings), that would indeed impact the (revenue) projections. In the first draft, we had clearly said the rates mentioned would be illustrative. I think that the basic objective of the code has been met (despite the compromises made).
Why have you put off the DTC to April 1, 2102. Was it to streamline it with GST?
It (the postponement) has nothing to do with GST. A whole lot of subordinate legislation has to be brought in place with regard to DTC. And we intend to follow the same, elaborate consultative process for these as we have followed till now for the principal Act. There is a fair degree of apprehension on the general anti-avoidance rules. These rules are going to influence FDI and other foreign investments. We need to frame the rules after extensive consultations with stakeholders. We need to give assurances (to the investors). Our team is a small and compact one, yet it has done a brilliant job (in drafting the DTC). We started on July 1 and managed to introduce the Bill in Parliament in Winter Session.
It seems the MAT rate and the corporate tax rate are being aligned.
MAT has been there for long for a special purpose and it will continue to be there for the same. We wanted MAT levy on gross-asset base so that there would be efficient use of assets. But Indian Inc did not accept that. There were other reasons also (for withdrawing the proposal to have MAT based on gross assets). Look at Air India, they have got Rs 5,000-crore assets or even more but if you tax them at 2% of that, it would indeed be a hassle for the PSU.
Such taxation would amount to the government putting money for tax, and shifting money from one pocket to another. However, applying MAT on assets is a sound principle. It could be introduced in future.
There is evidence to suggest that moderate tax rates lead to higher revenue.
It is the Laffer Curve that is being cited – revenue maximises at a certain (low) rate. As we have broadened the personal income tax slabs this year, the collections have also grown. We reviewed the collection trend the other day for the five months and the PIT has also grown by 18-19% against last year. You may recall that while reducing the rates and widening the slabs in the latest Budget, we had estimated a revenue loss of Rs 26,000 crore. The direct tax collection target for last year was Rs 3.7 lakh crore, and we could achieve Rs 3.8 lakh crore. This year, the target is Rs 4.3 lakh crore. Hopefully, we would exceed that target. It all depends on how the economy would do.
As per the DTC Bill, there won’t be a higher exemption limit for women. Is that stance under reconsideration given the adverse comments on it?
See, whatever has been proposed is proposed. Now it is for Parliament to decide. Nothing is cast in stone. There is a (parliamentary) standing committee, let them make recommendations and then we will see (if the benefit is to be retained).
Anyway, the rank and file of women who work in the vast hinterlands of India won’t be affected by the measure as they don’t pay any tax. We are talking about the urban women who are standing shoulder to shoulder with men. With due respect that is what ladies would say, we believe taxation rates should be the same, particularly for those women who come under the tax net. You may note that we’re already to lose Rs 53,000 crore revenue due to DTC. How much more do you want us to lose?
There is an absence of clarity on how Leave Travel Allowance would be taxed in the DTC regime.
Clarity on that would come in the subordinate legislation. It would specify something like for a certain limit, the allowance would be exempt.
GST is becoming more of a political issue than an economic one. Shouldn’t the political parties sort this out rather than making the job strenuous for the bureaucracy?
We are asking the industry to try and impress upon the state governments about the advantages of and the urgency for the system. Ideally, it was our expectation that we should be able to legislate both GST and DST together. By the way, the DTC was postponed not because of GST (delay). We are still hoping that we should be able to bring GST by the middle of next year. By law, there is nothing that says it cannot be implemented in the middle of a fiscal. Unlike income tax, there is no system that says that. In the case of DTC, we really felt that we need new language, new culture. The reason why we pushed DTC by an year is that we need subordinate legislation to be as impeccable as possible and in conformity with the new structure. Since it is a new law, we wanted that taxpayers, traders and tax practitioners to get adequate time to get used to it.
The role of GST council is one point of discord between Centre and states. What are the other issues that hold up GST?
The council is not proposed to have a role that is binding on anybody. It would recommend rather than decide. The council’s recommendations would be based on consensus. Consensus does not mean unanimity. Rather, it means a situation where nobody says no. So, what we thought was that this body, which is a significantly diluted version of what we had proposed, would be acceptable to states. What we had first proposed was the structure that would be binding on the governments. Initially, we (the Centre) were not in favour of a dual GST. We had said there would be a single GST, but the states said no. To accommodate their views, we then agreed for dual GST. We, however, need to ensure there is not going to be (much of a) deviation (from the rates agreed to).
We had initially said the council is going to be a binding organisation but they (states) felt that it would be too much of a loss of their fiscal autonomy. Now, we say 1/3rd is quorum and the decision is taken when none specifically disagrees. They objected to the Union finance minister having ?veto power,? but then we said, each state would have the same. We are trying to push through a grand design. It is for the larger good that I think everybody would appreciate. Again, some of the states felt constitutional amendment is not required and merely allowing the states to levy service tax will solve the purpose. Some felt that allowing the states to tax services and not allowing the Centre to tax goods will not solve the issue. Some of them say there is no need for a council, because the council will impliedly lead to loss of their fiscal autonomy. In our understanding, it is something to the advantage of the states because it allows them to present their case when circumstances demand it.
So, they feel that Empowered Committee with the finance minister as the Chairman will serve the purpose and ?simple majority? principle will solve the issue. We do not agree with this as simple majority does not serve a purpose of protecting interests of the government.
The states also say that the Dispute Resolution Body is not a good idea. But one must note that every dispute in GST regime is going to be inter-state in nature. In case of river water dispute, the constitution itself spells out a decision-making mechanism in the form of a tribunal appeal to whose decisions will lie to the Supreme Court only. In the absence of a similar set-up for GST-related disputes, they would all go to the court and the system could eventually collapse.
