Mukesh Butani, chairman of BMR Advisors and Ketan Dalal, joint tax leader of PwC in an interview to CNBC-TV18 shared their expectations from the upcoming Union Budget 2012-13. According to Butani, Pranab Mukherjee will be hesitant to make any statement on goods and service tax (GST) implementation and its roadmap because it then becomes a credibility issue for the government. "GST is not a Budget exercise because unless the constitutional amendment bill is passed, the Finance Minister cannot do anything for GST implementation," he added.
Another long pending issue, the Direct Tax Code (DTC) is also unlikely to get implemented this year because the standing committee of the Parliament has recently tabled its report on the DTC, said Dalal. Like many experts, he also expects DTC to be implemented from April 1, 2013 onwards. However, he feels there is a possibility of some provisions of the DTC finding their way into this Budget.
Below is the edited transcript of the interview.
Q: People are not expecting much this time but do you expect any progress in the Budget on goods and services tax (GST) this time around?
Butani: You have to understand that GST is not technically a Budget exercise because there is a constitutional amendment bill already pending with the Parliament. Unless the constitutional amendment bill goes through, the Finance Minister cannot do anything as far as GST implementation is concerned.
I also feel that the Finance Minister would be hesitant in making any statement on the GST including roadmap because it becomes a bit of a credibility issue then for the government. The passage of constitutional amendment bill for GST is a prerogative of both the houses of parliament. It is the slim majority of the ruling in the upper house of the parliament, which has been a road block for getting the constitutional amendment bill to pass through.
The Finance Minister and his cabinet recognizes that very well. I would be surprised if any statement is made other than saying that the government intends to bring the GST and it is committed to the GST reforms. These statements would be made without any commitment in so far as the timing is concerned because it becomes a bit of a credibility issue for the government at this point in time.
Q: The fear is of another postponement on that issue, on both those overarching tax themes which is GST and DTC do you expect any specifics to be announced in the budget this time or do you share Mukesh's view?
Dalal: The standing committee of the Parliament has given its report on the DTC just last week. With that having being just tabled, I cannot se the DTC coming in this year. the only possibility - unlike the GST the DTC can come only from 1st April of any year. The only possible date is April 1, 2013. Given what has happened on political front recently, the possibility of something going wrong even with that date cannot be ruled out.
After is the election year, but at the same time the possibility of some provisions of the DTC finding their way into the Budget cannot be ruled out. It is normally something which would be unusual and not recommended or may not be the right governance framework but for e.g. neutralisation of offshore transactions being not liable to tax India as a result of the Vodafone judgement is one possibility.
The other one which is significantly more sweeping is General Anti Avoidance Rule (GAAR). One wishes that it does not come but some parts of those kind of provisions showing up in the budget cannot be ruled out.
Q: From financial market point of view, the focus is also on the securities transaction tax (STT) and there are some expectations it maybe reduced or even done away with, conversely it could have some implication for the capital gains tax. Do you expect those provisions to be touched at all?
Butani: I don't know and I doubt if he would do it. If you go back to the Standing Committee of finance, they have recommended that STT should be abolished and the entire capital gains provisions should be recalibrated to state the position, which existed earlier.
I doubt that if the finance minister will carry out such radical change in terms of abolishing the STT and the reasons for that are many. I think in terms of his overall priorities, STT is not on the top. It is not right to say that he is not concerned about capital markets, but it is hardly going to make any difference to the capital markets. The last thing he would do is create any kind of confusion or stir in the capital market. So if he has to carry out such radical changes, he would abolish STT only as a part of the larger DTC package.
The point that Mr Dalal was making earlier with respect to certain DTC provisions figuring by way of amendment in the extant law, I think you also have to understand that there is a rationale and reason why he would do it. So some of the bear minimum provisions which are in the nature of anti-avoidance could be seen in this year's budget, but even if you did not have the DTC or even if you did not have the standing committee recommendations, those are some of the steps that the government would have taken.
For instance, this whole debate on anti-avoidance measures being stepped up by many countries within the OECD and the non-OECD, India cannot be left behind, that is one reason. The other possible reason could be that you have the Supreme Court verdict on Vodafone, which clearly points out a lack of clarity in the existing provisions of the law particularly with respect to actions of anti-avoidance provisions and that is the reason the Vodafone judgement went in favour of Vodafone. So there is also a kind of moral pressure that is coming in from the highest judicial authority in the country that India needs to have a meaningful provision.
Let us take the case of the CFC provision. Now, logically I see CFC coming in because if you look at last year's Budget, he did allow a 15% fixed rate of dividend withholding tax for Indian companies, and bear in mind, if you read the fine print of the Budget, it says that that window is only for one year. Now, that does not mean he can extend the window beyond a one year period, but I think the finance minister signaled CFC in the last Budget itself.
Take a case of advance pricing agreement. This is something that we have been debating for several years now. The kind of litigation on transfer pricing has touched unassuming proportion, so I think it makes logical sense for the government to bring about the APA law. The committee was set up 18 months back, views were being sought from various people in the committee, the officials from Department of Revenue did visit several OECD countries, did take into consideration best practices in many commonwealth countries including Australia, Canada, UK... So I think that also seems to be a logical extension of having the APA.
The summary is that I think we need to delink this year's Budget from the DTC provisions and even from the standing committee recommendations.
Q: Getting to the indirect tax part of things, over there people seem largely primed for some move both on excise and service. Will it be a 1-2% hike or do you think it could be sharper given the context of the fiscal deficit and it may actually shoot back to 14% perhaps on excise?
Dalal: I think this is a very difficult one for the finance minister because on the one hand you have the fiscal deficit likely to be at 5.7% instead of 4.6%, so there is huge amount of revenue pressure. On the other hand, the economic situation also require some stimulus in demand and hiking the service tax and excise too much might be a dampener from a demand standpoint. So all and all, my sense is that the possibility is of 10% (indirect tax) going to a 12%, but not beyond that. It's a major balancing act that the FM has to perform here, but I don't think it will go beyond 12%.
Q: What about service tax. How much of an increase and involving, what categories are you expecting?
Dalal: I think the service tax net is fairly wide anyway but they can spread the net little wider by just giving a negative list, for e.g, there is some talk of service tax on rentals for residential property also. First of all, I cannot see the logic of rental being a service in the first place, but be that as it may, that is one possibility. So the net getting wider and the rate going from 10% to 12% appear to be a possibility as we speak.
Q: On personal taxes, there is expectation that at least the bottom end of the slab will get some relief in terms of income tax payment. Is that what you think will be the likely course of action for the finance minister?
Dalal: Here again, the key issue is the revenue pressures, at the same time the standing committee has pointed out a very interesting thing. We have about 350 million assesses and almost 90% are in the up to Rs 5 lakh bracket which is relatively minuscule collection from them and high cost of collection. From that point of view, the standing committee said that the exemption limit could be increased from Rs 180,000 to Rs 300,000 and then a further calibration.
The standing committee recommendations has recommended that the rate from Rs 3 lakh to Rs 10 lakh should become 10%. I did some calculation that if those recommendations were followed that on an income of 10 lakh, the current tax is 152,000 and it will go to only 70,000, which is just 45% of what one would have otherwise paid on the current basis; and on 20 lakh, if Rs 452,000 goes to Rs 270,000, it is a huge drop in the total outflow.
One has to see the revenue implications of this and my sense is that there maybe some calibration but I am not sure it will go to the extent that the standing committee has mentioned purely because of revenue consideration. For e.g. 180,000 likely to go to 300,000? I am not sure, I don't think so. But is it possible especially with inflation also going up to 2.5 lakh? I think it is more likely. The further calibration may not be as steep as what the standing committee has recommended and I think that is mainly because of revenue considerations.
Q: What is your view on that because this is what some people are talking about that maybe we will get some relief for middle income earners because of the kind of slab changes and rate changes that Mr Dalal alluded to, do you think it is likely given his fiscal constraints?
Butani: It will happen and it will happen in two phases. So he is not going to directly move to taking the minimum threshold from 1,80,000 to 3 lakhs, he will probably do it in phases. Nothing mandates him to follow entirely the standing committee recommendations even next year if we see the DTC in 2013.
The figures don't matter. So just to give you a back of the envelope calculation, if based on '11-'12 personal tax collections, the finance minister follows the recommendations of the panel committee, in its entirety the loss of revenues is only Rs 11,000 crore. The reason I am using here only Rs 11,000 crore is because it just constitutes 7% of the personal tax collection, little over 2% of the direct tax collections from the government and a very small fraction of the overall government revenue. So, in terms of revenues, it doesn't matter much to him. I don't think Rs 11,000 crore matters even in this year's budget.
But, the important thing that concerns the government is not to take this step that you will have 90% of almost 3.3 million tax payers going out of the tax net. Bear in mind that till about a decade back we had only 1% of a population paying taxes, so we made significant progress in terms of broadening the tax base and bringing another 20 million people within the tax net.
Now for the government to implement a reform of this kind would mean taking out 90% of 3.3 million tax payers out. I don't think that from the government's overall tax to GDP, GDP to the number of people who are paying taxes make any sense and the government will be reluctant to do that. I don't think it is a quantum of tax that he will lose as a result of implementing the planned panel committee recommendations, it is the amount of tax payers he will have outside the tax net. That is an important consideration from a tax policy standpoint.
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