Parthasarathi Shome is of the view that higher income tax on the super-rich should be embedded in the tax structure itself...
The chairman of the Tax Administration Reform Commission (TARC) and former advisor to the finance minister, Parthasarathi Shome, is of the view that higher income tax on the super-rich should be embedded in the tax structure itself, instead of being collected as surcharge. In this email interview from London, he explains Santosh Tiwari the likely impact of critical Budget proposals and expresses concerns that the current goods and services tax (GST) model could end up being a tax that satisfies policy-makers, but has less to do to propel economic activity.
Do you think the roadmap to cut corporate tax from 30% to 25% over four years with the phasing out of exemptions is basically implementing the DTC framework for the companies at least? If not, what should be the roadmap?
The announcement to reduce corporate income tax to 25% is a brave and welcome step, and the government should be commended for this. It reflects the broad international practice to discuss and pre-announce. This will be good for business planning. There should, however, be no backtracking on new grounds. This was indeed what we had recommended in DTC 2009 but that is immaterial. The important thing is that the right policy has been opted.
Not doing this for personal income tax is clearly to avoid the possible political fallout, but is it a good idea? Will it not keep personal income tax regime cluttered?
I don’t believe individual income tax rates were not reduced for political reasons. The rates are as such not high by global standards. Given our per capita income—lowest among emerging economies and one of the lowest in the world—we should raise rates. There is pervasive tax evasion. Hence, as we indicated in the TARC, income tax net has to be spread wider to tap and quickly double the number of taxpayers. Look around you at the vast and rapidly growing services sector and it is obvious where the net has to be cast.
How far do you see the changes introduced for tackling taxation of indirect transfers will help? What more could have been done or should be done?
The government has taken the right step in specifying 50% as a minimum of assets in India (in global assets) and 5% threshold to keep out participatory note holders. However, the committee recommended not to override treaties or tax companies traded on the stock exchange (those that pay STT). These should also be incorporated. And, certainly, application should not be retrospective.
Do you see a positive change in the government’s handling of the retrospective amendments?
I plan to spend some time to see the main retrospective legislative changes that are prevailing today. Policy-makers need to be made aware of it so that they can take a view on what they desire in light of the Prime Minister’s declared policy to enhance the ease of doing business.
The surcharge in normal course should be avoided but how do you see it in the context of the super-rich, especially when the TARC has been in favour of a higher tax on the super-rich?
In advanced societies, the rich are willing to pay higher rates and larger volume of tax under the presumption that the government provides social—education and health—services as well as successfully redistributes income to the less well-off. In India, experience reveals that public funds are habitually looted. In backward districts and levels below, sometimes no fund trickles down, if NGO documentation is to be believed. Yet policy-makers and administrators seem largely oblivious, instead of taking this up on a war-footing. I recall when I raised this issue once, a highly placed individual responded there must be a PDS outlet every 50 yards in India; so where was the question of poor delivery? It left me speechless. All this is by way of a caveat. The bottom line is that the super-rich should be free to earn and keep the better portion for themselves but they must pay tax commensurately with their cohorts in the rest of the world. They currently pay minuscule percentages on income and dividends. This must change and should get embedded in the regular tax structure rather than as a surcharge, which smacks of being a temporary contribution from them.
While abolishing wealth tax, the finance minister said that the details which were to be provided in wealth tax returns will now have to be given in income tax returns. This can make filing of income tax returns cumbersome. Isn’t it?
Wealth tax in its current form should have been abolished and the government took the right step. But it should be reintroduced as a small tax, perhaps 0.1% to 0.2% on all—tangible and intangible or financial and non-financial—wealth. Why ask for wealth information on income tax return? The last released wealth tax return is complex and asking for such information without the intention to tax could be interpreted as leading to excessive taxpayer burden. What we need is (1) a new wealth tax as I explained; (2) only then ask for appropriate information on wealth; and (3) impose the tax on a drastically simplified wealth declaration form.
Service tax rate has been raised to 14%. Is it a move towards GST? What could be the rates and is GST feasible from next year?
Service tax being raised to 14% can be linked to the total effective rate on goods if you add retail markup at states’ level to manufacturing at central level, though the exact arithmetic might be checked. However, the issues over GST are in the current lack of adequacy in its overall structure, including the fact that rate bands being allowed to states will result in innumerable effective rates, and keeping petroleum out will lead to cascading, so that the positive impact on business and trade would get curbed. Second, there is no proposed cell to monitor its impact on inflation so the consumer can suffer. Third, there is lack of clarity on the clearing house needed for inter-state trade so traders can face huge hurdles to get input tax credit. It worries me that this could end up being a tax that satisfies policy-makers but has less to do to impulse economic activity.
The norms for tackling black money have been tightened and prosecution has been brought upfront. Will this not lead to high-handed behaviour of the tax officials and also corruption?
The government has taken the right steps to address black money. The thrust should be within India itself. Without success in this area, India cannot progress economically, leave alone socially. There may be some expected high-handedness as officers correct the matter but hopefully it will pass. Investigation officers have too many cases of extreme illegal activity using black money and the new measures will increase their workload. This work vertical should be rapidly expanded while regular assessment work could be streamlined. Corruption will become more visible and can be addressed if the highest tax officers are ready to take bold steps. Overall, the government took a good step and it needs to keep up the pace on this.
The finance minister mentioned in the Budget that the government would be implementing the recommendations of the TARC to improve tax administration. Which are the proposals that could be among the first ones?
I am glad the finance minister mentioned that TARC recommendations are at an advanced stage of examination and will be implemented in FY16. It has 15 chapters spread over four reports, an executive summary and a final volume listing all recommendations and detailed feedback by field officers from eight metros. I was impressed at the support and belief in the recommendations from them and I am convinced that they are ready for change. This last volume has a section on immediate steps to be taken. They include reorganisation and implementation of a large business service in which all specified common functions will be conducted jointly—without duplication—between CBDT and CBEC, a rapid drawdown of the stock of existing disputes and introduction of strategy to manage disputes, a true reorientation towards customer focus, and others. We have given a detailed roadmap, and it is available under TARC at the finance ministry website.
Do you think the FY16 tax collection growth targets over FY15 RE (16% for gross tax realisation, 10.45% in corporation tax, 17.5% in personal income tax, 10.4% in customs, 24% in excise and 25% in service tax) are realistic as compared to the previous years?
The TARC has emphasised in an entire chapter why point estimates of tax revenue have been given up in the rest of the world and how to carry out revenue forecasting. The finance ministry should adopt a globally recognised approach and stop pressing officers to collect revenue willy-nilly. It has a deeply deleterious effect on economic activity, diverts good officers from productive activity of reducing tax evasion through necessary operations and, most fundamentally, is diametrically in contradiction to the government’s objective of rejuvenating the economy.