One clear message is that the government is very serious about black money. We are quite concerned that the proportion of direct tax in the total tax kitty is very low. There is a very high amount of tax evasion and it is only for this reason that all these measures are being taken, including demonetisation and also the subsequent measures to stop the future flow of black money in terms of changes for methods of political funding, the proposal to put a cap of Rs. 3 lakh for cash transactions, putting a cap of Rs. 10,000 for business expenditure. For a trust also, we are saying they can only accept donations of up to Rs. 2,000 in cash. All these are some of the measures to prevent the future flows of black money.
How do you explain the surge in advance personal income tax collections that have grown a record 34% in the first three quarters of the year?
People are now more alerted. We do not want to harass anybody but at least there is a fear that the government is watching us and if we don’t pay, then there will be larger consequences. That’s why the advance tax figures have come in at 34%.
Has most of this spike happened post-demonetisation?
All the three quarters of the current year, we see an upward trend. We started with the Foreign Black Money Act and then gave the Income Declaration Scheme (IDS) for (tax evaders). So some people would have thought why pay so much in IDS, why don’t we simply declare normal income? So some people started showing more turnover in the books and started paying advance tax without participating in the IDS.
You have granted sops for lower income groups, but the tax slabs were left untouched…
The benefit of tax reduction is given to all taxpayers. Ultimately, these are the people that are paying taxes… people who are declaring more than Rs. 5 lakh income are 76 lakh, out of which 56 lakh are salaried people.
Now there was no option for them, those who get a salary. So this was just a message to the honest taxpayer that you have been paying taxes for all this time, we would like to benefit you. So every taxpayer is being benefited a little bit. But ultimately, we should be able to have a more rational taxation system in which even the slabs can be increased, provided people don’t evade taxes. If people have the opportunity to evade taxes, they try to do so. So we are trying to bring them into the tax net. We want more people to pay taxes honestly.
You have pegged gross tax revenue growth at just 12.2% for 2017-18, compared with 17% this year. Is that an admission that there might be some lingering effect of demonetisation on growth and tax collections?
No. We are just being conservative on indirect tax. That is the main reason. Secondly, in direct tax, we are showing some 15.3% growth. And that also, we expect to exceed, not fall below, because the revenue will definitely increase on the direct tax side, mainly on the personal income tax front. So that is our attempt, but this is only a conservative estimate.
Growth will not slow down. Corporate income tax income may not go up so much.
It will remain at whatever is the nominal GDP growth rate. But the personal income tax collections will go up next year. So I expect both numbers to go up next year. 8.8% growth in indirect taxes is also conservative and 15.3% growth is also conservative.
There was an expectation of a lower corporate tax rate.
It will happen over a period of time. Right now, what we can afford, we have given and that will really take care of the competitiveness of the MSMEs. They are worst affected.
Their effective rate of taxation is 30%, as the FM mentioned. Whereas the big companies asking for a tax reduction, their effective rate is only 25%.
Is that a balm for the adverse effects of demonetisation on MSMEs?
No, the aim was to increase the competitiveness of MSMEs compared to large companies. They have to have an edge. And that edge will help them survive and flourish in the market. They are the ones creating maximum employment. And this will encourage firms to migrate to the company format, because on firms, the tax rate is 30%.
Were you considering some incentives for the Rs. 5 lakh- Rs. 10 lakh income bracket as well?
The demand from the market was something very unexpected. They asked for an exemption limit up to Rs. 5 lakh.
Now, you have seen the numbers. If I exempt people up to Rs. 5 lakh, my entire tax base will go! 75% of the people will go away. Out of 3.7 crore, 1.95 crore are in the bracket of Rs. 2.5-5 lakh and 99 lakh people are below Rs. 2.5 lakh a year (but filed returns).
So we would be left with only 70 lakh people to pay taxes then.
Now, is it possible? The second demand was a 10% tax on the Rs. 5 lakh – Rs. 10 lakh bracket, 20% tax on the Rs. 10 lakh – Rs. 20 lakh bracket, and 30% for Rs. 20 lakh and above.
We had done a rough calculation and this would have required a Rs. 70,000 crore sacrifice by us in our revenue. It’s not easy to do it, because the tax base is so narrow!
The people who are paying are the ones who can’t escape it. Those who can escape it, will escape.
We also had this other challenge. People were demanding that we increase spending and reduce taxes drastically in this Budget. How is it possible to do both?
We increased expenditure substantially on infrastructure and in desirable social projects like education and health. Some economists had this advice: increase your spending and reduce the tax rate and they also demanded that we maintain the fiscal deficit. Now, who can perform such a miracle?