Personal tax reforms may get deferred due to elections: Naina Lal Kidwai

Pankaj Patel, President, FICCI, Dr Arvind Virmani, Economic Mentor, FICCI and Naina Lal Kidwai, Former President, FICCI, in the Budget roundtable with ET Now, discuss the fallouts of demonitisation and consequent formalisation of the informal economy and what effect that will have on the Budget. Edited excerpts:

ET Now: Mr Patel, as Ficci President, do you think it is possible for the Finance Minister to deliver a dream budget? The Finance Minister does not have a magic wand.
Pankaj Patel: The amount of money which the government has received after demonetisation, with the informal economy moving transforming into formal economy along with the push on digitalisation, has opened a lot of opportunity for India. In the process, the Finance Minister would have additional resources available to actually give a new push to the economy.

ET Now: Mr Virmani, we have all seen the IMF cut India’s growth forecast with this financial year by a whopping 1%. They have also trimmed the growth forecast for the next financial year, we have already seen what the CSO has to say. Are you expecting the government or the Union Budget to come out with new targets as far as growth goes?
Arvind Virmani: For the current year till March, they will go by the CSO’s estimates but as far as implication for budget is concerned, you got to remember that past numbers really do not affect the budget. There seems to be a big misperception that because growth is overestimated or under-estimated for the current year, they have a huge problem. That is just not true because they have the actual expenditures which come through the accounts of the RBI and the revenues which is collected and that will form the base. Now when you go forward and project it again, it is not the real growth which matters but the nominal growth because all the revenues and expenditures are connected to the nominal growth.

That is the first thing but as to your direct question, I concur with the President of Ficci and I would just add one more thing. Voluntary tax compliance in Income Tax whether it is corporate or personal was expected to go up. I projected it immediately after demonetisation and whatever little data is available seems to suggest that is happening.
ET Now: That is what even the Finance Minister has reiterated that they are going to pass on the budgetary estimate as far as indirect and direct tax collections go. Naina, while we have seen revenue collections shoring up you have also seen growth taking a beating thanks to demonetisation. For example, the PWC Global Chairman at Davos was saying that Chief Executive Officers from across the world are now in wait and watch mode. When it comes to India, it is no longer the preferred destination. What do you think the three top things that Arun Jaitley must do so India once again becomes a preferred destination?
Naina Lal Kidwai: Growth has to be a key element of this budget going forward.

If profits are lower, collections will be lower. I do not know how the robustness will stay in terms of overall numbers even while compliance goes up. So near term clear impact is an issue. However, what we can hope for is that it clealy requires that growth is kick started again. Anything that goes into public sector spending which this government did extremely well in its first year, pushed a lot of GDP growth into the system. Whatever elbow room there is to go back into capex, public sector investment would be a big plus.

The second would be anything again to do with jobs because people who have lost jobs in the formal sector are going into NREGA and these pockets must see some benefits.

The third would be anything which helps consumption because that will help production come back. So putting more money into the hands of people, the urban middle class and the rural poor would again kick start the system in terms of consumption led growth

ET Now: Mr Patel, give us a little insight. We have not seen a pickup in the private sector investments. What can Arun Jaitley do so that we see return of investments from the private sector?
Pankaj Patel: The private sector invests when there is a demand and what we need to see is demand to pick up and there are a couple of things we need to do for demand pick up.

ET Now: But even when demand was there, the government always complained that the private sector was not investing?
Pankaj Patel: So private sector investment will come into classical industry which are already existing. They would invest more when there is more demand in the market and then they need to produce more to supply. That demand pick up cycle has to start and that is why we need to provide more money in the hand of people through tax rationalisation so that people are able to spend more and when demand picks up, I am sure private sector will come forward to invest.

With respect to infrastructure investment which was being done under PPP mode by the private sector, the whole infrastructure investment have gone through several issues including regulatory delays and in the process a lot of private sector has suffered. Also, the consolidated accounting system and taxation system has not come in as far as the infrastructure investment is concerned, particularly when these have been done through SPBs. Some of the projects may earn and some projects may not earn but if you are able to consolidate, then of course there will be more synergy and more investment will come in.

ET Now: Dr Virmani, do you agree with that? Do you think that it is only because of demand that private sector has not been investing and perhaps not because of all the other problems that the private sector had to grapple with? That if this budget delivers, we will see the return of the private sector’s investments?
Arvind Virmani: I have been talking for sometime about this duality in the economy arising from excess global demand. So there is a huge tradeable sector where excess capacity created by China and the weak demand globally particularly in developed countries is affecting us negatively. These are also capital intensive areas. In that sense, demand is a problem because there is excess capacity and the best way to resolve it is to look at the capacity utilisation.
When I last looked at it, capacity utilisation had creeped up from about 60 to 70%, but then it got stuck there. When you get up to 75% or 80%, you would start getting more investment. So there is that element of it but of course there are also a lot of other things and we have talked about these like ease of doing business etc. There is also a third factor. When you make institutional changes like the bankruptcy law, there is a transitional problem. So a lot of cases she was telling me have got shifted from the regular courts to the bankruptcy courts. But those are not yet ready. So some of these transitional problems can have a negative effect which delays getting the full benefits of the change which must be made for the medium long term interest.

ET Now: Naina, what have you observed about this institutional change? You are going to have another big one which is of course the roll out of the goods and services tax (GST) perhaps by 1st of July?
Naina Lal Kidwai: These changes have positive impact on industry. While companies will have issues as they move into the new regime in terms of implementation, it will be countered by some of the positives there. So I am less worried about transitions like GST, the bankruptcy law which is a big positive and may not be even getting the kind of accolades it should.
But the real issue -- exactly as Pankaj and Dr Virmani have said -- is now around excess capacity which is borne out by the fact that demand just is not there and in fact demand has dropped further thanks to demonetisation. So if capacity utilisation is sub 70% and I think it actually has to get to 80 to 90% before industry begins to look at the next cycle of investment , we are just not there for that. I do not see private sector investment coming back in a hurry which is why my view would be in this budget, there has to be focus back on public sector.

ET Now: I want you to don your banking hat. One of the reasons that demand is also not there is because the credit offtake is so poor. When can we see the banks actually go back and increase credit offtake? I am sure demonetisation has helped them boost that treasury income and improve their balance sheets.
Naina Lal Kidwai: Yes. The good news is of course banks now have higher deposits and so to some extent there is at least the ability to lend. But the borrower has to want the money and that will come as the cycle comes back into growth and the need to borrow. The other aspect of credit offtake which has suffered is demonetisation . It has really burdened banks with just dealing with the act of dispensing money and most banks just stopped doing anything else. So some of the issues you are seeing is just the sheer pressure on the operating environment where even credit and wealth management products etc. at a branch level suffered because the whole focus has been around dispensing cash. The other worry I have is because revenues of banks have come off in the last couple of months. Because of this focus that the NPA percentages are creeping up and so banks de facto do not look as healthy as when we went into the remonetisation cycle.

ET Now: Do not expect any improvement in credit offtake in the near term, is that what you are saying in a nutshell?
Naina Lal Kidwai: There are challenges and there will be an improvement but it will be slow as it comes back.

ET Now: Dr Virmani, in the last few budgets one saw the finance minister take advantage of lower crude oil prices. That does not seem to exist any more. How is that going to play out in the upcoming budget?
Arvind Virmani: Crude prices have already moved up. It has touched a low of $30, was around $40 at the beginning and now it is between $50 and $60. Most forecasts predict this will remain the range because the shale oil from the USA which had become uneconomical at overtly low prices, will be back in operation, whenever prices move towards $60. So looking forward, that seems to be a fairly stable for next year.

More important will be tax reforms an opportunity for which has been created by demonetisation. Of course the GST is in the works. We have been discussing it. CIT or corporate income tax reforms was promised earlier. In my view, it has been a bit slow and I hope the Finance Minister is able to accelerate it. There are two more areas of reforms. Basically, there has not been any import export duty reforms which in my view is necessary. In fact, I have been writing to these people ever since the new government came in but that is a separate matter. Personal income tax is one area where there is a great opportunity for reforms.

ET Now: Mr Patel, you are representing industry. One of the big triggers of course is the Union Budget but there is also uncertainty over Donald Trump following a protectionist policy. Dr Virmani did touch upon import-export policies. Are you hoping or do you want this government to also adopt a protectionist stance at all which could impact companies like yours as well?
Pankaj Patel: The changes which are expected are very uncertain and we do not know exactly what is going to be the change. However, to be proactive and be vigilant about it, it is going to be very important for our nation. I very strongly recommended to the government is that we should formed a high power committee consisting of leading industry houses and businessman and the senior government officers to really watch this very carefully and react to it whenever there is need to do so. We canmot take a view at this moment because we do not know exactly what is going to happen. However, we should have a plan ready for eventuality.

The other point which I wanted to touch base here was this new regime which is coming up. Because of demonetisation, the informal sector will start moving into formal sector and we need to find out in this budget how to welcome this move. These are basically going to be small enterprises and we need to create a simple tax regime, a simple way to handle things. That way the overall tax compliance in the country can be increased.

ET Now: Dr Virmani, GST rolls out on the 1st of July. Do you think in the interim it would be fair for the finance minister to tinker with indirect tax rates in the upcoming budget and I am not just talking about sugary drinks and junk food or tobacco?
Arvind Virmani: We have been doing so for long and of course subsequently there has been a gradual rise in the service tax. I would not be surprised if that gap is closed further and I do not think there is really anything to object to that if it is also balanced by good personal income tax and corporate tax reforms.

ET Now: Naina, do you think GAAR is going to be deferred?
Naina Lal Kidwai: I would like to hope that anything that helps the economy, helps foreign direct investment, helps money comeback into the stock market -- money which is actually turning away right now at the foreign institutional level would be helpful. But my concern is certainly a high expectation at a personal tax level. If you think of the arguments I was putting forward in terms of demand being important for consumption to come back, a logical demand would be personal income tax coming down. My worry ism doing this budget at the end of the month, the election commission may most likely have its way of insuring that certain things are not done and personal income tax may well be one of those things.

ET Now: Well I do not know if it is alright for five states to hold the rest of the country to ransom.
Naina Lal Kidwai: I just do not know but my fear is that the personal tax agenda may get deferred and we may not be able to see that benefit today because of the following elections. Corporate tax of course is an area which hopefully does not suffer the same fate and there Pankaj’s point is very important. That the agenda that has already started through the demonetisation and pulling the MSME and SME sectors in to the tax net to keep that agenda going would be very important.

ET Now: How to do that, would you want incentives for the MSME, SMEs?
Naina Lal Kidwai: Yes, I would like to see the incentives because you have to have a carrot and stick approach. The stick is clearly there already. The carrot has to be incentives for those who declare and encouragement for reinvestment.

ET Now: When we talk about personal income tax. Dr Virmani, is there even any scope to do so? If you look at the balance sheet, if you look at the number of people that are being taxed, and how many people actually have an income of more than Rs 10 lakh that declared, it is abysmal. It seems as if the only minority in India is actually the tax payer. So what are you expecting? Is it to raise the minimum limit for taxable income? To restructure the slab? Is it something to do with home loans etc? What are you expecting?
Arvind Virmani: First, to clear the misperception I found in many places. When I say personal income tax, that includes non-corporate MSMEs and their business income and that is why it is so important. Of course I agree with Naina that personal expenditure will also be affected.

ET Now: But even if you look at the people that pay business income tax, the number of that is not even 35% more than the service people it is a fact.
Arvind Virmani: Yes, I am coming to that. One thing to remember is that personal includes business income of small industry or trade whatever. So that is very important from that perspective as she emphasised just now. The second point you said is about compliance rates. About 20 years ago. I calculated the rate that about 25% of those who should file their returns file and about only 33% of income is declared. Surjit Bhalla tells me that the number is exactly the same even today. So,-part of that is as again Naina has said that the danda (stick) has been going on for the last year or two. We also need the other side which is to make it simpler and easier and less onerous for the 25% or 33% honest tax payers so that those on the margin come into it. I have just written a paper which shows that it is possible to do that. The revenue neutral single flat rate would be 12%. That would be a huge incentive for voluntary compliance. I am not saying a flat tax will actually come through but there are other possibilities of reducing these rates for honest tax payers while bringing in those who are not fully paying.

ET Now: Mr Patel is this the opportunity post demonetisation and once GST comes in to actually reward the people that have been paying taxes, especially the salaried class?
Pankaj Patel: Definitely we need to do a complete relook at the tax structure across personal tax and the corporate tax. The Finance Minister has already made announcements in the past that 25% is what is their objective and I believe that it is time to really see the 25% number coming in. We definitely see that the personal tax rates are changed significantly, slabs are changed in the process.

ET Now: But change what? Are you expecting a change in the tax slabs?
Pankaj Patel: The slabs or minimum slab should go up to Rs 5 lakh at least and then so on further and total tax should not exceed 25% as Finance Minister has mentioned in past. Widening the tax net will be very important and irrespective of taxable income or not. anybody who has x income say for example Rs 12 lakh should require to file tax returns. Of course, they may not have to pay tax because exemption may be available to them and also then in the same time we should make sure that the regime of tax should be changing from just punishing people to basically more compliant and target based assessment of officers.

We should move into thinking about how do we really see that? How they become tax friendly, client friendly and incentivising them to do so. Once the informal sector becomes formal, they should be benefited by a fixed rate of taxation which is currently already available but also consider providing them some kind of support in terms of may be skill training, may be in the area of providing them lower rate of loans to certain amount and things like that because it is going to be very important to make the economy really vibrant.

We need to really see that informal sector comes into formal sector and whatever we do for that would help not only the economy growth but also success of GST regime as well.