We have given a balanced report on DTC

Live Mint, March 14, 2012

There is a need for the government to push important tax reforms through the direct taxes code (DTC) Bill, in line with the recommendations of the parliamentary standing committee on finance, said Yashwant Sinha, chairman of the parliamentary panel. It should streamline tax bands, make tax authorities more accountable, and ensure more focus on people in the higher income bracket, he added in an interview, stressing that the government also needs to evolve a national consensus on important policy reforms, such as DTC, goods and services tax (GST) and the pension Bill. Edited excerpts:

How would you sum up the standing committee?s report on the direct taxes code (DTC) Bill?

I think we have given a balanced report. I kept telling the committee that we should give a report which should not be outlandish; should be practical, reasonable and doable; (and) should strike a balance between the requirements of the government and the revenue department and ensure equity for the assessees. I think the committee has done a reasonably good job of striking this balance.

On individual taxes, we have increased the exemption limit, increased the investment limit for which exemptions could be available. We have made the slabs (tax bands) more realistic and in tune with modern times.

Wherever we felt there was no need for change, like in the case of NRIs (non-resident Indians) and non-profit organizations, we decided that there was no need to interfere with the law just for the sake of change. That?s where we have been conservative.

On the corporate side, we have left the rate unchanged. Obviously it will come down because the cess will go. We have agreed with the government that the tax concession should be linked to investment rather than profits. On the General Anti-Avoidance Rules (GAAR), we have introduced moderation where we felt that the government has given too many powers to the tax department, which could result in harassment of genuine taxpayers.

What is the next step on DTC?

We have turned in our report (on 9 March). I wanted to make it available to the government as soon as possible. That is the reason why I went to the Speaker on Friday and turned in our report. We have got a little delayed. If we were able to get it done a month ago, it would have been even better. But I didn?t want to hustle the committee into accepting something about which they were not convinced.

This was the best way to build a consensus. Let everybody have their say and, out of a discussion, a consensus will emerge. So that process has taken a little time.

But I am glad we have been able to give it before the budget. I know that most part of the budget would have been prepared. The only thing that the finance minister may still be working upon is his budget speech. So, he can still make a reference in his budget speech to the report submitted by the committee.

Even though you have managed a consensus within the committee, the report is still radically different from what the government has proposed.

The committee has brought ground level experience to bear on the recommendations we have made. All of us are involved in some way or the other. It?s not merely the official wisdom of North Block (where the finance ministry is based) but the people?s wisdom that has also been included through the committee.

The government does not have a very good record of floor management (in Parliament) and working with the opposition. The committee managed to get a broad consensus for this singular piece of tax reform where members across party lines were present. Do you think the government will accept it in its current form?

Let?s take the example of the pension Bill (Pension Fund Regulatory and Development Authority Bill). We were able to get a consensus cutting across party lines. When the government came with the revised Bill, we found some of the important recommendations were not included. When Pranab babu (Mukherjee; the finance minister) decided to talk to us, I told him these are very reasonable recommendations. If somebody wants all my money to go to government securities and wants an assured return there should not be any problem. It?s like subscribing to EPF (Employees? Provident Fund) where most of the money goes to government securities. This was a very reasonable recommendation.

We felt strongly about foreign direct investment (FDI). We said it should be a part of the Act like the insurance Act and not part of the rules which the government can change without coming to Parliament. He was comfortable with both the recommendations and told us these will be changed through official amendments. But, with the Trinamool Congress raising objections, I don?t know the status of that Bill.

The government should accept the recommendations of the standing committee on DTC. The ruling alliance members have a majority in any standing committee. Then how can the government say, ?No, we will not accept the recommendations?.

Politically it?s a weak government after the defeat they have suffered. In the mid-1990s, coalition governments were able to push through a lot of reform initiatives. Do you think this kind of a politically weakened government, given its track record, will be able to push through such a massive piece of reform?

We pick up one item of economic reform. And then inside and outside the country, that reform is shown as the one piece of reform that is going to change the face of the country. In 1999, it was insurance. Today it is FDI in multi-brand retail. It might be important or unimportant. That?s not the issue. The issue is that reforms have to be looked at in a very comprehensive manner and differently if you want the reforms to become acceptable to the people. Why aren?t the reforms acceptable to the people till today? Because it has very little in it for the people.

Therefore, let?s not latch on to one reform and say this is the panacea. No single reform is a panacea. You will have to reform across sectors in order to be able to make an impact.

We have not built up a national consensus for reforms till date. We need to look inward in order to find out on why certain reforms go through and other reforms don?t. There is a problem with multi-brand retail. But not even the Left parties (the Communist parties) told the government not to build more national highways and rural roads, issue more kisan credit cards, halt supply of coal to power plants.

As far as infrastructure is concerned, there is no opposition. There are a lot of reforms to which there is no political objection. VAT (value-added tax) is an example of how you can build consensus. Why was the empowered group created? VAT is primarily a state reform. If states didn?t feel ownership, then how would VAT have got acceptability? I wish something of more of this had happened with goods and services tax (GST).

Take cotton exports. Why was a decision taken to ban cotton exports and then reversed. So you decide first and think later. Isn?t that the policy? On the whole telecom thing, cabinet decisions were turned down by a minister. Nobody was bothered about it till the Supreme Court intervened.

So, will DTC go through?

DTC should go through. DTC, as suggested by the committee, is a very reasonable piece of legislation. But if they reject some of our very important and reasonable recommendations, then there will be a problem. And I myself will stand in Parliament and say that it is not acceptable.

You have asked for wider tax bands which will hit government revenues. But you have not made any suggestions on how the government can make up for the revenue loss.

Some committee members said we should raise exemption limit to Rs.5 lakh. I did not agree for the very reason that you mentioned. But from Rs.1.8 lakh to Rs.5 lakh, you have over 20 million assessees paying a tax of Rs.10,000 crore annually. This Rs.10,000 crore could easily be made if the tax administration was to give greater attention to the higher than average income groups who should be paying more than Rs.5 lakh each in tax.

Then GAAR provisions, controlled foreign companies, transfer pricing and advanced ruling?all this will help you get more revenue.

So don?t be cluttered with a very large number of small tax payers. Concentrate on the higher income brackets?the professionals in the field. The salaried class is a sitting duck. But the non-salaried class, the professionals?how many are really paying the right amount of tax? The department should go conduct survey, find out and bring them into the tax net.

There is a great push on accountability in your recommendations. Do you think that is missing from the tax administration given that a lot of companies have complained about the department?s aggressive stance?

Yes, in fact, towards the end of the fiscal year, more than one member has brought it to our notice that the income-tax department is twisting the arms of corporates to turn in more tax because they are facing a shortfall. This is almost appropriation. Why do they do it? It is because they have so many powers and they misuse these powers. So surveys and tax raids should be the exception rather than the rule. They have already imposed MAT (Minimum Alternate Tax) on SEZ (Special Economic Zone) companies and it is at 18.5%. It is not consequential and you are getting tax from them.

From the corporate India point of view, the biggest message of DTC is clarity in tax laws and tax rates. The government can?t act retrospectively. Will there be a review mechanism put in place?

Corporate India has clear predictability. DTC is not a piece of legislation which will last five years. It should last 50 years. So it will obviate the need for the finance minister to present a finance Bill with every budget. Especially after GST is rolled out, even more, the need for this will go up.

So the budget as we know will cease to exist?

Part B of the budget should cease to exit. It becomes a policy except for a paragraph or so of changes. So people do not need to bite their nails to see what is coming in part B.

What is status of the goods and services tax?

I think we will have a much greater challenge of building a consensus not only within the committee but between the centre and states as far as GST is concerned. But I am quite sure that the standing committee on finance will be able to play a role in building a consensus. The standing committee will take into account all of the concerns of the states. We will start stakeholder consultations whenever we get time in the session.

The states are very upset over the Centre?s refusal to pay central sales tax compensation. Is there a commitment problem of the Centre on GST or is it just bad politics?

It appears that many of the acts of the Government of India today are thoughtless. I don?t know at which level it originates. Especially today, when you need to be particularly sensitive to the states? needs and centre and state relations. For them to commit a faux pas of this kind is totally inexplicable.

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