Finance Secretary Hasmukh Adhia says the government took a conscious decision to impose the Long Term Capital Gains (LTCG) tax to create a balance among investment instruments. “Favourable tax exemptions do distort the market to one class of asset. Why will anybody invest in debt instrument if he or she is getting very good return of 15-17 per cent per annum from long term capital gains in stock markets? Why will anybody even invest in bank deposits which are taxable at normal rate, that is, 30 per cent?,” Adhia said in a wide ranging interview with The Indian Express. Excerpts:
GST has been accounted for 11 months and it has been said that it’s a one-time impact. Why not for 12 months as anyway it started in July, so it could have been annualised. Also, the logic is that the revenue flows into the next month, then will this happen next year also?
No, it will not happen next year. We will have full 12 months. Next year onwards, it will be regularised, it will be only for one year. And secondly, our revenue accounting is cash based, it is not accrual based. If it is accrual based, then we can say that alright this is in respect of March, so even if it is received after March 31, it will be accounted for in the current year. Our system is cash-based accounting. We tried talking to the CAG (Comptroller and Auditor General of India), but it refused. This is the reason. It (GST) is not 11 months, it is 8 months for this year and total indirect tax will be for 11 months. So, GST revenue, what we are estimating is for 8 months.
Where will this March’s collection be accounted for?
March collection will come in April and the next March 2019 collection will come in April 2019. Then it will become 12 months and then it will become regularised. Every year it will become regularised.
How come the two of the biggest announcements — the health insurance scheme and MSP — that you have made in the last Budget have no details, no provisions, no detailed plans so far. Was there some background work already done on this?
Lot of background work was done. NITI Aayog worked on the scheme of universal health insurance and they know all the details. As far as MSP (minimum support price) is concerned, it was a commitment this government had made in their manifesto. So, they have decided to honour it and as far as the actual procedure for procurement is concerned, of course, right now the Government of India is doing procurement, but if you want to widen it, you will have to involve states in it. So, there are couple of schemes which are in discussion and NITI Aayog, as mentioned in the Budget speech, will talk to states and come out with the final option.
Will this come up for Cabinet approval?
Yes, once they have discussed with the states.
There has been a wide range of customs duty hikes aimed at promoting Make in India. But, is it a sign that India is also moving towards protectionism like other countries?
Well, we are not talking about the kind of protectionism which other countries are doing. We are taking a very small opportunity of protecting our MSME and that also with a marginal rate increase. It is not that we have done exorbitant rate increase, 250 per cent or 100 per cent, so that nothing comes virtually. That is not the idea. The idea is that there are countries of the world…who try to systematically dump those goods, which are manufactured only by MSMEs in India. Now, MSMEs don’t have the capacity to go in for anti-dumping procedure because they don’t know what are the statistics in China, they will have to present a case that this company’s cost of production is this much, they are selling in domestic market at this rate etc. So, that’s why the government has to proactively protect their interest by marginal increase in the customs duty. That is what we have done. Other than electronics, where the idea is very clear that we do want to create capacity in the country instead of encouraging people to bring readymade LCD/LED TVs and cellphones. There our strategy is well known, we are in the phased manufacturing plans, so gradually want to encourage only in India. But other than electronics, all other items are MSME items — furniture, footwear, toys, video games.
On the MSME front, the corporate tax has been reduced up to Rs 250 crore turnover but when the original announcement was made, it was assumed that it will be across the board for all companies and top 1 per cent is still left out. So is there a commitment still in place?
It is for the government to take a view on it. (That’s) the political side. But the bill for reducing it for everyone was very high at Rs 60,000 crore. Secondly, even if we do it, it is not going to heavily affect the new investments because for them we have already announced two years ago that any new manufacturing investment which comes will have 25 per cent rate to begin with. So, they are rest assured about that. How will it (tax reduction) affect? Additional benefit will only go in the pockets of the shareholders of these companies. Whether or not they will invest in manufacturing, we don’t know. But instead of that if we actually collect that money and use it for spurring the rural demand, then it would have beneficial impact on the GDP growth rate and apart from alleviating the miseries of people.
After 15 years, the LTCG tax proposal is back. What discussions happened around it? Was increasing the holding period also discussed?
One thing is there that the government was thinking about it since last year. Last year, there were lot of discussions on this (tax), finally, we couldn’t take final decision. This year, instead of even government feeling the need for it, the market was saying. Every single player was saying that there is a need to tax this sector. Actually, demand also was rising very strongly that why are you giving this extra benefit to a class of investors who are not doing any active business. It is just investment of that money and then out of that, what they are earning is completely tax free. Why? This is a question being asked legitimately.
If you are a salaried class or if you are doing business and putting in all your risk and labour, in spite of that, whatever you earn you pay 30 per cent. Then why should we give this concession to one class of people. The time when this decision was taken to withdraw (LTCG tax), there were different circumstances altogether, in terms of FIIs, Mauritius, Singapore, then the predominance of FIIs at that time and the DIIs were at a disadvantage vis-a-vis FIIs because they used to pay no tax. Those were different circumstances, now it is not the case.
The massive domestic mutual fund inflows back the decision to tax now?
No, that is not the reason. We have been thinking about it for quite some time but idea is that if you continue to give favourable tax treatment to one class of asset, one class of investment, then naturally it will so happen that everybody will try to out all their money there. That’s why people are saying that price-to-earning ratio of many of these stocks are far above what they should be. It should not happen that small investors are then repenting because naturally it’s a demand-supply function. If the same shares are being bought by so many people then naturally price will go up.
Was there a worry that there is a bubble in the making?
Not a bubble but it should be a healthy decision based on price-to-earnings ratio rather than favourable tax exemptions that you are getting. Favourable tax exemptions do distort the market to one class of asset. Why will anybody invest in debt instrument if he/she is getting very good return of 15-17 per cent per annum from long term capital gains in stock markets. Why will anybody even invest in bank deposits which are taxable at normal rate, that is, 30 per cent. So much of injustice to one class of investors vis-a-vis various other class.
Were there any concerns about small investors?
We have taken care of that. The Rs 100,000 (threshold). A small investor, apart from salary income, apart from other income, if he is investing in stock markets, he has got a portfolio of about, say, Rs 7-8 lakh or Rs 10 lakh and he is earning capital gain of up to Rs 100,00, we are exempting it. And that’s given to everybody and it’s not that if his capital gains income is Rs 1.25 lakh, so we will tax entire Rs 1.25 lakh, it will be levied only on Rs 25,000. Rs 100,000 exemption is available for all. Up to Rs 100,000 small investor, yes, you take the benefit. It’s virtually extending your slab from Rs 2.5 lakh to Rs 3.5 lakh.
(Small investor) has been taken care of, grandfathering has been taken care of. But for grandfathering, market would have fallen much more because then they will say that there is no grandfathering and we should sell it now. Why should we wait? Now at least they will wait and sell after one year, so that they get the benefit of capital gains tax for those 8 months or 10 months if they have already invested.
How strong do you see the argument that the markets will shift to Singapore, Hong Kong because there is no LTCG tax there?
It won’t. We have said that right will come to us from April 1, 2019. Only for one year they will get 5 per cent benefit. Who will go all the way to Singapore for 5 per cent benefit.
Is tax compliance a worry on direct and indirect tax front, especially GST?
In GST, we will have to bring an e-way bill as well as the matching of invoices, which is the final thing which will help us in GST.
E-way bill system under GST on Thursday did not function properly.
Yesterday (Thursday) we had technological glitches, we can’t help it, so we have extended the trial period for some more time. If we have so far waited for 6 months, we will wait for 5-10 days more. We don’t want to trouble the traders because of our fault, so we have admitted that it is because of technological glitches and we will correct it and come back. So we have given some more time.