Finance secretary TV Somanathan talks about the rationale behind key decisions in the Union Budget 2024-25, and the government’s approach towards growth and equity, in an exclusive interview with KG Narendranath and Prasanta Sahu. Excerpts.
On the tweaks to capital gains tax regime
Currently, the most elastic and growing source of income in the economy is capital gains. Taxation of long-term capital gains on equities re-started in 2018 after a break of about 14 years, and considerable revenues (Rs 1 trillion a year) are already coming in via this source. The increase in the rate of the tax (from 10% to 12.5%) is very modest one.
Streamlining of the tax treatment of asset classes is the primary objective (of the changes in tax rates, holding periods), but revenue is definitely a motive too. However, it’s not our objective to keep raising the tax rates.
The rate correction, though small, would give us a lot of additional revenue in the years to come because the market is widening and capital gains as a share of income in tax returns is rising at a fast clip.
We have also taken care of the small investors by raising the exemption limit from Rs 1 lakh to Rs 1.25 lakh.
Data show that 88% of the capital gains income returned is by those whose annual income exceeds Rs 15 lakh, and 62% of the receipts are from people with annual income above Rs 1 crore. The high-income segment (Rs 1 crore plus) will pay most of the tax, which in terms of equity, is quite fair.
In fact, capital gains are a source of rising inequality globally, thanks to appreciation of financial assets. We don’t have anything against them (financial assets), but the gainers should pay their fair share of taxes.
If you hold a small business or salary earner, your tax rate can go up to 39% (the maximum marginal rate with surcharge for income above Rs 5 crore), and you now pay long-term capital gains tax (LTCG) at 12.5%, which I think is fair. There has been a lot of differential (between tax on business income and capital gains). A differential is justified in theory, but not, as much we used to retain.
On Personal Income Tax (PIT) now being the largest source of tax revenue (19% of government receipts in FY25BE versus 17% from corporate tax).
In a society like ours where a large number of people have started owning shares, and where organisations like EPFO own shares, shifting more of the tax burden from corporations to individuals is a pro-equity step. When corporations are taxed at a high rate, the tax incidence moves away from the super-rich and becomes average across all. If the corporation pays tax, it affects the dividend recipients including salaried person, the mutual fund owner, EPFO investor etc.
So, the current shares of personal and corporate taxes in revenue are more or less correct. We should not over-tax corporations thinking that they mean the rich. We have now decided to tax proceeds of buybacks at the hands of recipients at the applicable income tax rate (instead of 20% rate at the company level). This is also among one of the several measures taken to promote equity, as among the beneficiaries of the tax at the company level were some of the richest promoters, including those in the information technology sector.
In recent years, we closed the avenues for the super rich who used to keep huge EPFO balances (of as much as Rs 200 crore), and make (low-tax) returns from investments in market-linked debentures, which are practically fixed interest instruments. Similarly, some of the insurance policies were used for pure investments, and this has been corrected too. The plugging of these loopholes is one reason why PIT receipts are rising.
On the possibility of a plateauing of tax revenue growth after the sharp increase since the pandemic.
That’s also why we have begun the effort (with) capital gains. The big positive step was taken in 2018, by reintroducing LTCG. I think it was an unconscionable thing that the source of income which accrues to the richest parts of the country, was totally tax-free. We were attacked a lot for this, people asked how you will collect when you grandfather it till 2018. Fresh capital gains started accruing, and we are already collecting a very substantial amount as LTCG tax, the lion’s share from equities.
Way forward on pension reforms
The old pension scheme (defined benefits) is ruled out, but we are looking at addressing the core concerns of employees about their pensionary benefits. These include pension not being at the mercy of market fluctuations, some compensation for inflation, and a minimum pension for those without full service. This is what we are trying and we are hopeful of addressing these concerns.
On I-T Act redrafting and rates
The simplification is not about rates. There is no intention to change rates. We will take old Direct Tax Code as one of the inputs, not as the guiding light.
On “over-emphasis” on fiscal correction and “minimal consumption push”
There is a balance to be struck. We have approximately used half of the extra RBI dividend for expenditure and the balance for fiscal consolidation. I feel that fiscal consolidation is a necessity. This year our interest burden has grown by about 9.5% as against (nominal) GDP growth of 10.5%. So to start any new programme (which is difficult to close), you must rely on permanent sources of income, not one-off ones (like high RBI dividend).
On Economic Survey proposal to open investments from China
The survey has given a professional opinion, which ought to be taken seriously, but the government has taken no such decision. A careful balance between security and economic considerations is necessary.
On excluding food inflation from inflation targeting framework
It’s an interesting suggestion (in the survey) which needs careful examination. It isn’t very clear how much monetary policy could influence food price inflation, as demand for food is largely inelastic.
Food supply is not based on economic trade, being largely driven by monsoons, global wars etc., none of which susceptible to these instruments (interest rates). One cannot change the price of wheat by changing the interest rate or produce more it it ensure more investment into its production (influenced by monetary policy). So, the influence of monetary policy on either the supply or the demand in the food market is limited. That being the case, the survey has raised a very valid point as to whether food should be an anchor for monetary policy, for a developing country which needs to balance growth and inflation. There are of course those who will give a counter view that if demand falls, then food inflation can also fall.