People are now more alert about the tax authorities, Revenue Secretary Hasmukh Adhia said on Thursday, citing the record 34% spike in advance personal income tax payments this year. He also defended the Budget’s conservative estimate of 12% growth in tax revenues in 2017-18, compared to 17% this year, and said this had nothing to do with the prospect of a lingering impact of demonetisation on growth in the coming year. Edited excerpts from an interview:
What’s the message from the Union Budget for tax payers and evaders?
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. This is not a good thing for a country as it is regressive to levy more and more indirect taxes. 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 method 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 to 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 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 increase 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?
The Economic Survey spoke about the need to allay fears of tax terrorism…
That is why we have made Operation Clean Money. We are not sending any officers to anybody’s house. We just want to do everything in an e-enabled environment. That’s what we have done. We are saying ‘hey, here is the data we have about you, what do you have to say about it?’ You can reply to that data online only. If you go and search that window, it is very interactive. You can also say that I have not done this deposit, or that the entry does not match with your name also. There may be mistakes in that, but you are free to clarify. Once we find your explanation is genuine, we will close the window. We will take no further action.
This time around, when you were preparing the Budget Estimates for indirect tax collections, were there any changes in the methodology to see how much you would be getting because the GST Council has not yet decided the GST rates for the different goods and services?
The first thing is that we have not accounted for any rise or fall in the oil prices for estimating next year’s revenue. But definitely we don’t expect any windfall to come, in terms of any more increase in the petroleum sector. Like this last year, where we got some windfall.
Secondly, because we are going to enter into GST, we have to wait and watch for one year. Because we are sharing tax with states. The service tax revenue, which is about Rs 2.5 lakh crore, will be shared half and half between the Centre and the states. While we are getting a right to tax commodities in the entire value chain. We will have to see whether the states will gain more or the Centre will gain more, even if the total taxation kitty remains the same.
The other thing is that we do not expect 100% compliance in the first year. There may be some people… That’s why we have to keep our fingers crossed. In the second year, we will definitely see much more buoyancy in GST. So we have been very very conservative in our indirect tax estimation. We have kept it at 8.8%, which is very moderate compared to what we got this year and last year.
There is an emphasis on quoting PAN for certain transactions… Are you getting any sense from the Income Tax Department if there is any surge in the issuance of PAN cards?
There is. And now we have made it compulsory for all bank accounts to hold it. By February 28, all banks accounts have to give PAN, other than Jan Dhan accounts. They either have to submit PAN or Form 60. It is compulsory and people may face difficulty if they do not submit their PAN. The operation of their account may have to be stopped. This applies to existing accounts as well. There are 25 crore PAN cards issued already.
Is incentivising the use of PAN the reason that you have said in the Budget that for tax collected at source, failure to provide PAN will mean paying a higher rate of tax?
No, that is done for the purpose of TDS. If I am supposed to collect TDS from you, I deduct TDS from whatever I am supposed to pay to you and give it to the Income Tax Department. But you do not provide PAN. Why? Because you don’t want to come in the tax net. So you will say take my 10% TDS. But that 10% TDS is not enough because you might be taxable at the 30% rate. So we are saying if a person whose TDS is being deducted, if he doesn’t give PAN, it is 20%.
The FM has said that oil prices are a headwind that we have to think about…
It is a headwind, but I don’t think it will go up that much because shale gas will kick in.
You have allowed banks to set off a higher amount on their tax dues from NPA provisions.
This will help the profitable banks like SBI. If you are making a profit, you can claim larger deduction because of NPAs. This means their income tax liabilities will go down. We have not made any estimate on how much this will cost. There will be a substantive loss. But it will help public sector banks whose NPAs are significantly higher.
Is there a timeline you are considering for the removal of MAT?
No, we can’t say about the future. Right now, this is all we have given, 15 years for availing. We have competing demands of funds. Even in MAT, our total income was something like Rs 60,000 crore last year. It’s not a small number we can do away with. But it is only an advance tax. Tax credit for it can be taken in 15 years.
