Clarifying the government's stance on the Double Taxation Avoidance Agreements (DTAA), the Finance Minister P Chidambaram said in an exclusive interview to CNBC-TV18 that Mauritius should not be the preferred route of investment.
"Investment comes from over a 100 countries, so I don't think Mauritius can or should be the preferred route for investment. There are other routes for investment but Mauritius does give a certain advantage to the investor today. If the advantage is enjoyed by genuine Mauritius resident or businessmen, then we have no complaint," he elaborated.
He, however, added that participatory notes (P-notes) holders will not be touched by General Anti Avoidance Rule (GAAR).
Reference of tax residency certificates (TRC) in Union Budget 2013 had sounded the alarm on Dalal Street for which the finance ministry had to issue a clarification that that there was no intention to question tax residency certificate holders and "TRCs will be accepted as evidence of residence."
India's 82nd Budget came as a disappointment to many after Finance Minister P Chidambaram failed to recreate the dream budget he presented in 1997.
Given the fact that this was UPA II's last Union Budget before general elections of 2014, expectations were that the FM would focus on wooing FII investors and attract more inflows into the country.
However, Chidambaram who was presenting his eight Budget chose to play it safe with a pragmatic Budget rather than a populist one.
While the Opposition finds Chidambaram's Budget insipid, rating agency Standard & Poor's says this year's Budget would have no impact on the country's sovereign credit ratings.
Another let down for the country was the Q3 GDP data. India's growth slowed to a 15-quarter low of 4.5 percent in the October-December quarter lower than the 5.3 percent a quarter ago, and the 6 percent growth seen a year-ago. He expects the economy to grow at 6.5 percent in the next financial year.
Below is an edited transcript of his interview with Shereen Bhan.
Q: In your Budget speech, you said we need foreign investment and it is imperative, if we need to battle with the current account deficit. In that context, we then see a red herring in the form of the TRC issue, which you now have clarified 24 hours later. In the mind of a foreign investor there is a disconnect, between what the Indian government says, what the Indian government intends to do and what the Indian government finally does?
A: We are talking about Section 90, sub Section 4 to Section 90 was introduced last year. It is intact, that it has not been touched. In addition, last year in the memorandum explaining the Finance Bill, there was a paragraph; it caused no concern, no confusion last year. The same paragraph word-for-word, without adding a word, without deleting a word has been lifted and put as sub Section 5. Now if it caused no concern last year, it should have caused no concern this year too. Nevertheless some people suddenly discovered that this sub Section 5 had a sinister motive, that the tax department will go behind the TRC and question the resident status of a person. Far from it, there was never any intent to question the residence status of a person who produces a TRC.
I explained it to the media yesterday, and I think the market calmed down. This morning when the market opened there were no jitters on that score. Then, I decided that it is better that the central board of direct taxes (CBDT ) issues a clarification. Following what I clarified to the media yesterday and they issued a clarification.
So, there was no confusion in my mind, there is no confusion in CBDT’s mind. But if some people either genuinely or otherwise misunderstood the language of sub clause 5, which is the same as what was there last year, I can show, I can match it. Then I thought it is best to clarify, that's what we have clarified.
Q: That clarification certainly has allayed apprehensions as far as foreign investors are concerned because you have categorically stated that there is no intent to go behind the TRC?
A: There is no intent to go behind the TRC to question the resident status of the person.
Q: Then, every year or every couple of years this boogie of Mauritius and P-notes is raised. Foreign institutional investors (FIIs) want to know what is the long-term tax direction of this government? What is the message that you would like to send out to FIIs besides the clarification that you have already put out?
A: The India-Mauritius DTAA is under discussion with Mauritius for about the last six or seven years. We would like that treaty to be revised, but we are not going to do it unilaterally. We want to do it in discussions with Mauritius which is a friendly country. Therefore, those negotiations are still going on but we would like it to be revised. There are only a few countries with that kind of clauses in a treaty.
Investment comes from over a 100 countries, so I don’t think Mauritius can or should be the preferred route for investment. There are other routes for investment but Mauritius does give a certain advantage to the investor today. If the advantage is enjoyed by genuine Mauritius resident or businessmen, then we have no complaint.
However, there are reports that the treaty clauses are being taken advantage of by some people. Some would call it 'misuse', some would call it 'taking advantage' of, which is why we commenced negotiations. However, as long as our negotiations are incomplete, we don’t want to do anything unilaterally.
As far as other issues of P-notes are concerned, we have clarified. I have already clarified it when I issued the statement on GAAR. I said that while GAAR will be invoked against the entity that indulges in tax avoidance agreements, P-note holders will not be touched by the GAAR provisions. This has been clarified already.
Q: One quick question on Mauritius; you said you don’t want to move unilaterally on treaty revision. Negotiations as we know have been on for over six or seven years now. Where do things currently stand as far as the review of the Mauritius agreement is concerned?
A: I think the minister is coming to India in March or April. I don’t have the exact date. I think the negotiations will be continued when he visits India.
Q: I want to move to the retrospective tax amendment and the Parthasarathi Shome Committee report. The committee has been presented to you – the disappointment was that one was hoping to hear you clarify the government’s intention as far as the retrospective amendment related to Section 9 indirect transfers are concerned. You were silent in your Budget speech. The bill is silent on that. A whole set of tax and legal experts that we have been speaking to say that merger and acquisition (M&A) transactions are held up on account of lack of clarity and ambiguity on that front?
A: I do not agree. The people who are speaking on your channels are speaking on behalf of clients. They are not expressing an objective neutral or academic opinion on the position of law. Each one has a client behind them, and I respect their right to speak in the client’s interest. But, I don’t think that should weigh with you. What Shome said- 'As far as possible, government should not make retrospective legislation.' It becomes necessary to make a retrospective legislation than collect the tax alone, and waive the penalty and interest. That is an unexceptional principle.
But today, there is no pressing need for me to move the amendment, that amendment can be moved only after we resolve the Vodafone issue which gave rise to this controversy.
Vodafone has now offered conciliation. I am going to take it to the cabinet, and ask whether we should conciliate. I have told Vodafone, 'I want the matter resolved' and I told them, 'if you want to resolve, suggest a way forward'. So, they have suggested conciliation. We will consider this in the cabinet and if the cabinet gives a green signal, we will go to conciliation.
Once the Vodafone issue is resolved there will be clarity about how to word whatever amendments have to be worded. We can always move an official amendment. If the issues resolve say by March or April – we can always move an official amendment. There is no pressing need now to move any amendment until the Vodafone issue is resolved.
Q: In terms of the conciliation offer, Vodafone has made it very clear that they are not interested only in an interest penalty waiver; they would like some concessions on the principal amount also. Is the Government of India willing to move on that front?
A: You are not the conciliator. The conciliators will come up with solutions.
Q: And you hope that there will be resolution found by March or April?
A: I want a resolution, but it takes two hands to clap. If Vodafone wants a resolution, I think there will be a resolution.
Q: When we are talking to foreign investors, the sense that we are getting, and this is ofcourse anecdotal based on the conversations that we are have, they are saying multinational companies (MNCs) feel like they are a soft target in India today?
A: On the contrary, the chancellor of United Kingdom (UK) George Osborne has said, UK feels that they are the soft target of MNCs.
You have seen the joint statement made by Osborne and the German Finance Minister Schäuble. You have seen the Organisation for Economic Co-operation and Development (OECD) statement. Many countries today believe that their tax bases are being targeted by MNCs, that their profits are being distributed over different jurisdictions to avoid tax. I am not using that language, I don’t wish to use that language – all I am saying is that a developing country needs to protect its tax base and revenues. Therefore, we will take whatever measures that are required within the ambit of the law to protect our tax base. When Mr. Osborne and Mr. Schäuble make those statements, no one complains.
Q: Starbucks threatens to pull out of the UK?
A: Let them pull out and we will see. I will wait for the day when Starbucks pulls out of the UK.
Q: What is your message to the foreign investor at this point of time who feels vulnerable and thinks 'I am a soft target'?
A: That’s not correct. There are number of people investing in India. Japan and Korea are investing in India. So, I don’t think you should be carried away by people who appear in your channel and speak on behalf of clients. We have got money coming to India both as foreign direct investment (FDI) and FII. There are companies investing in India. Why do you assume that anyone is being made a soft target?
Q: I am not assuming. I am saying that, that is what they are stating?
A: That’s why I am saying we should ask somebody who is stating it, whose opinion is he voicing? His academic objective opinion or is he speaking for a client behind him? And there is nothing wrong in his speaking for a client except that you must recognise that he is perhaps speaking for a client.
Q: Let me talk to you about growth. 6.1-6.7 percent is the estimate that the economic survey has held out. You believe that, you will be able to get to the upper end of the wide range; that is the hope that the economic advisor has shared with us as well. The consensus on the street is at best 6, top end 6.4 percent. Could your Budget arithmetic go wrong, if you are not able to do the top end of the 6.1-6.7? Are you hoping for more than 6.5 percent in terms of the GDP number?
A: We are assuming only 6.5 percent GDP growth and 6.5 percent inflation. And applying the formula 1.065 multiplied by 1.065 you will get 13.4 as a nominal GDP growth. So, we are not assuming anything more than 6.5 percent.
Q: What are the downside risks to that? The Q3 gross domestic product (GDP) number of 4.5 percent is well below what the economists and tax experts were expecting. The consensus was at 4.8-4.9 percent and you are hoping to get 6.4 percent. Are you feeling confident that the downside risks are now outweighed by the upward bias?
A: No. We are not making any assumptions. We are assuming that the measures that we have taken and announced in the Budget, and the measures that we will take, will restart the growth engine. Our savings ratio in 2011-12 was 30 percent. That was the bottom we have hit in seven or eight years. Even at 30 percent, given an Incremental Capital-Output Ratio (ICOR) as bad as five, we should get a six percent growth.
Therefore, we are making a realistic assumption that savings will go up in 2013-14. It will probably move up to about 32 percent or 33 percent. If our ICOR remains at 4.5 or so, we should get 6.5 percent growth. So, we will have to find out why we are not getting the growth, despite the fact that savings have not gone below 30 percent.
These are questions that are engaging us and the chief economic advisor has made a study of this. He has advised me that the growth rate could be in the band between 6.1-6.7 percent.
Q: You made it clear that you believe the current account deficit (CAD) is the enemy number one at this point in time. You said you have to deal with and how you deal with it is something that is not completely in your control. You have more control over how you deal with the fiscal deficit as opposed to the CAD. In that context, there is disappointment that there wasn’t much clarity on how you intend to tackle the CAD with the exception of talking about the foreign trade policy and how you and the Commerce Minister will try and address the export strategy in a more aggressive way. However, we know how vulnerable the world is looking. What can we really expect in terms of imaginative ways to deal with the CAD?
A: I have not heard of any imaginative suggestions. Our CAD is large because we are importing a lot of oil, coal, edible oil, pulses and gold. Except for gold, all the others are absolute necessities to keep the economy going and to keep peoples needs met.
The only way one can address the CAD and every country has done it that way, is to boost exports. One has to export enough to pay for the imports. That doesn’t require great explanation in the Budget speech. It is a self-evident truth that a country has to export if it has to pay for its imports.
Therefore, in March, the Commerce Minister will work on the foreign trade policy. I have assured support to all measures that he will take to boost exports. That will be announced in March and then we will go forward in the next financial year.
In the meanwhile, the only way we can reduce our dependence on imports is to increase domestic production. There is a paragraph on what we will do on oil and coal imports. In terms of oil seeds and pulses one cannot do anything in the short-term. On gold, I can only appeal to you and through your channel to the people that to not demand so much gold.
However, I am not sure too many people will listen to me on that. Therefore, we threw some sand in the wheels to make gold imports a little more costly and it has brought it down to some extent.
Q: Is there a case for more duties?
A: There is a point at which more duties will only tempt people to indulge in more smuggling. I don’t think we have reached that point yet and we shouldn’t reach that point. I am hoping that the people of India will heed my appeal and not demand so much gold. For example, if the people of India stop buying gold for one year, that will solve most of our problems in that year.
Q: There has been a lot of talk and the possibility of a sovereign bond issue. Is that something that you are contemplating or looking at exploring?
A: There are plusses and minuses to a sovereign bond. One has to consider whether it should be dollar denominated, a foreign currency denominated or rupee denominated. There are plusses and minuses. I have discussed it, but I am not considering it actively.
Q: If you were to go down that route. Which sovereign bond would you prefer- foreign denominated or rupee denominated?
A: There is no conclusion on that.
Q: Will we see a conclusion on that anytime?
A: No. We are not considering that option actively.
Q: Yesterday, you said that there was a lot more that you would have liked to do in the Budget which you couldn’t. What is it that you would have liked to do? What held you back?
A: The economic space is constrained as it is limited. Neither can you give away the tax base or tax revenues nor can you raise more revenues from people who can afford to pay. So, one is hemmed in on both sides. Economic space is restricted, within that space one can only do this much. If the economic space was larger, we could have done some bold experiments on some more decontrol, some more announcements on projects. We could have done that if the economic space was larger than what we have today.
Q: Since you brought up the issue of decontrol, the revision on diesel prices is happening monthly. Are we likely to see any movement on liquefied petroleum gas (LPG), for instance besides just the cap on the number?
A: It is amusing. If we put a cap on the LPG, there is a campaign against the cap, and then there is a campaign to raise the cap. And then you ask me the question, will you do more to contain the subsidy.
On diesel, the minister has made it clear that the petroleum companies have been given the freedom to make small corrections periodically and I don’t want to add to that statement. The policy statement is that they will make small corrections periodically. On LPG, still there is by and large calm in the country after we raise the cap to 9 cylinders.
So, there is no reason to stir the hornet’s nest now. We will leave it at 9. However, in the transfer of that subsidy if we can move to the direct benefit transfer (DBT), I think there are gains to be made. There are economies that can be affected. So, we will try to move the LPG subsidies to the direct benefit transfer scheme. Now, as far as other subsidies are concerned, food and fertiliser subsidies are unavoidable. We will have to find ways to deliver the subsidies more efficiently and save from leakages, duplication and falsification of accounts. However, the DBT will give us significant savings when we transfer a number of payments through the DBT.
Q: On the food subsidy, you said you don’t have a bill yet. You have provisioned Rs 90,000 crore in the Budget and you could revisit or review that number once you have the bill. That caused a question mark as to what happens then to the fiscal deficit number if you were to provision much higher. Once you do have the bill, do you believe even if you were to increase the number, it will not be significantly higher than what you have already provisioned for?
A: We have provided enough for food subsidy. We have provided Rs 80,000 in the normal food subsidy and Rs 10,000 crore is for the incremental costs. We need to know what the bill contains and we need to cost the bill. We also need to know when the Food Security Act will be rolled out because there are many states which were opposing it. There are many states which do not accept the recommendations of the standing committee. It is only when it is rolled out that we will know how many states are willing to roll it out under the new act and how many want to cling to the old system.
It is too premature to put a cost on the food security promise. So, Rs 10,000 crore is a reasonable first estimate. If it has to be revised upwards, it will be revised upwards, but then we will find savings elsewhere.
Q: You spoke about the disinvestment target of Rs 40,000 crore and Rs 14,000 from outside of the regular disinvestment route. How soon can we see the government divest on the Specified Undertaking of the Unit Trust of India (SUUTI) front because this has been something that is going back and forth for several months now?
A: There is no confusion about that. We will have to take policy decisions on which of the SUUTI holdings we will disinvest. There are strategic considerations. Therefore, once we decide which are the SUUTI holdings that we will disinvest, we will simply go ahead and disinvest them, now that we have the offer for sale (OFS) route.
It is a pretty simple method. We have got some residual stake in non-government companies. So, this Rs 14,000 crore is not only SUUTI, it is SUUTI plus the residual stake in non-government companies. Once the issues regarding the non-government companies are resolved, we will then decide which of them to sell and when to sell. I am not saying we will sell all of them. Having regards to all the items that are available for sale, my estimate is we can raise Rs 14,000 from that sale and then Rs 40,000 comes from pure disinvestment.
Q: You have set Rs 40,847 crore as a target for the spectrum auction. AUSPI had put out press releases which say that this number is not credible. They say this is because there is a litigation risk as far as one time spectrum fee is concerned, plus there are no takers for the 900 Mhz spectrum at this point in time. What are your views on this?
A: I have got a statement signed by the department of telecom (DoT) listing the components of that Rs 40,000 crore number. I will certainly hold them to that and ask them to make sure that this revenue is available. It includes one time fee, revenue share for the licenses that are already there, spectrum usage charges, payments they have to make in the licenses that were bid two months ago and they have to make payments.
So, it is a total make up of four or five components. The new licenses are under litigation, but why does one assume that litigation means delayed payment? If the litigation quickly travels up to the highest court it is quite possible the payment may be accelerated.
Q: I want to talk to you about the pending reforms in particular on insurance and pension. I had a conversation with the former finance minister Yashwant Sinha and he said it is convenient for the government to talk about engaging with us on these matters when they want to and not engaging with us when they don’t want to. Can we actually see 49 percent in insurance and pension? Are you engaging with the BJP, is this going to be a reality?
A: I have had two rounds of formal discussions with the two leaders of the opposition and I am sure they have briefed their party leaders. I have spoken to Yashwant Sinha on the phone and told him about my discussions with the two leaders of the opposition and suggested that at the next round of discussions it would be useful if he is also present, but that's a call their party has to take.
The two leaders of the opposition have assured me that there will be another meeting early next week before the bills can be taken up. I think they are inclined to find a point of convergence and they are free to come up with suggestions. We will place our suggestions and I am sure there will be a common intention on the part of the governing coalition and the principal opposition party to pass the two bills.
Q: In the Budget session?
A: In the Budget session. Once I get an idea of where the principal opposition parties stands, then I will talk to the other political parties also. We passed the banking bill and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Bill in the last session, in the same manner, after my talks with the two leaders of the opposition. There is no reason why that method should not work this time too, and I am sure other leaders in the BJP including the former finance minister will give their inputs or will be present at the discussion. We can take it forward and find a solution and pass the bills.
Q: Continuing on my conversation with Yashwant Sinha, he very categorically yesterday said ‘forget about goods and services tax (GST), it is not going to be a reality in the tenure of this government.’ I know you have provisioned Rs 9,000 crore, trying to get this process moving, but that's doesn't seem to be the willingness on the part of the opposition party who controls a large majority of those states to actually get on board?
A: That's an unfortunate comment if he made it, because Sushil Modi who chairs the state finance ministers group has made a statement only yesterday. He has welcomed my statement in the Budget speech. He has said that the trust deficit has narrowed considerably. My statement in the Budget speech is a faithful reflection of the minutes of the meeting chaired by Modi, where the minutes say that the state finance ministers have agreed on the need for a constitutional amendment, on a need for a GST model law and on the need for the centre to compensate the states for their loss in central sales tax (CST) reduction. So, I have faithfully reproduced the minutes. And to show our commitment, I am putting Rs 9,000 crore.
Q: You believe GST will be a reality in your tenure?
A: I am inclined to believe Mr. Sushil Modi and that he can deliver. He may have a couple of BJP's state governments to talk to, but that is something which the BJP has to take a call on. If Mr. Sushil Modi is to be believed and I believe him; I think he will deliver the BJP states and we should move forward.
Q: GST if finally does come, it is going to be a big boost as far as the GDP is concerned. You have put out a credible roadmap as far as fiscal consolidation is concerned. You have delivered on this year’s number, and you hope to deliver on the 4.8 percent number. How accommodative do you believe the Reserve Bank can be?
A: I can't say how accommodative they will be. I have discussed the matter with the governor, and have taken him in to confidence about the fiscal deficit numbers. I told him that he should carefully follow my speech and other things that are provided for in the Budget. I am sure he will discuss this in the monetary policy advisory committee. I hope they will take the right decision in April.
Q: But do you believe that there is enough elbow room for the Reserve Bank to move at least another 25 basis points?
A: That is a call they have to take. All I can say is lower policy interest rates will help achieve 6.5 percent GDP growth.
Q: There is a worry that as you get closer to the elections, your party will start being more populist? Can you allay those concerns and apprehensions?
A: Elections are 14 months away and politicians and political leaders are not as dim-witted as some of you think. We also have our heads screwed to our shoulders. We know that we can go into an election with our head held high if there is growth, if there are more jobs, if inflation is tamed and, if the people have the confidence that tomorrow will be better than today. So, just as people silently applaud stability and growth, politicians also see the virtue of stability and growth. You may not attribute that much common sense to politicians but speaking as one let me tell you we believe in growth and macro economic stability. There is no reason to believe or think that anyone will scuttle that policy.
Q: So, in that context, do you believe the threat for ratings downgrade is past us and hopefully we are likely to see an upward revision though most rating agencies have not changed their outlook on India post yesterday?
A: There was never any real danger of India being downgraded. If the rating agencies were looking for candidates to downgrade, I could have suggested several other candidates to them. There are only two countries currently, that are growing at a faster rate than India. Next year, there will be only one country growing faster than us if we achieve our growth rate of 6 percent plus. The euro zone is in a crisis. Europe, is contracted, Germany is contracted, UK is contracted and Japan is stagnant. Then why pick on India? However, I respect the rating agencies and it was my duty to allay their apprehensions. I think I have done it to the best of my ability.
I do not think there ever was and there certainly not today, any real danger of India being downgraded. If anything, the outlook must change to positive and we must be a candidate for upgrading.