Big Ideas for the Big B

We are days away from the Budget and the government this time is going to be walking a very tight rope. Trying to pump prime the economy or jumpstart the economy on one hand and raise revenue - at least not spend that much more - on the other. So this week we are looking for three Big Ideas for the BIG B: the Big Budget.

Dinesh Kanabar, Partner, PricewaterhouseCoopers; Sudhir Kapadia, Partner, Ernst & Young; and Mukesh Butani, Partner, BMR Advisors; provide the answers.

Here is a verbatim transcript of Dinesh Kanabar, Sudhir Kapadia and Mukesh Butani's exclusive interview on CNBC-TV18. Also watch the accompanying video.

Q: Why don't you lay down your big idea [for the Budget] for us and then we will open up the debate?

Kanabar: From a tax perspective the big idea is really stability. The less you do the better you are off. One of the things does come up is that over a period of time at one level our tax rates are really not out of sync with either this part of the region or the world. But the effective rate of tax which we end up paying is substantially different. So you have a corporate tax, you have a dividend distribution tax, you have a fringe benefit tax and fringe benefit tax is of course is something which some much has been spoken that one does not even want to speak a little bit more on the subject. But in effect what you do is not to provide a rate of tax which really everybody understands. What you have done over a period of time is to do away with all the incentives, all the subsidies that would be provided to the mechanism of direct tax incentives, exemptions, deductions etc. But yet your effective rate of tax and what you actually end up charging are very different.

The question is: can the government come up to say here is a rate of tax which is applicable to everybody and here is a dividend distribution tax which is far more rational than what it has been and bring some transparency in the process?

Q: What would you propose be the one singular tax rate that they apply to all companies across all industries?

Kanabar: A tax rate of 30% for example is absolutely in sync with what the world does, that is not an issue. The issue is that you should not be having surcharges around that, you should not be having a fringe benefit tax in and around that and you should have a dividend distribution tax which is far more less than what it is today, probably half of what it was.

Q: At a time where various industries are already hankering for extensions of exemptions do you think there is likelihood that we can actually clean up this distorted version of higher tax rates but lower effective rates because of all the various exemptions and provide a clear tax path as Kanabar is talking.    

Kapadia: Two observations here. One is this recommendation for a lower corporate tax rate especially by removing surcharges was there in the Kelkar Committee report many years ago. But he also mentioned as Dinesh rightly said, that this will be in lieu of the exemptions being phased out. So that is the clear linkage which was established from a policy perspective.

Q: Doable?

Kapadia: Certainly doable but the caveat is the following. Today we are living in extraordinary times. If I just look at what 24 or 27 other counties have done around the world it is very interesting that 56% of all fiscal stimulus measures are on the tax front. So that is the kind of weightage given to tax measures. So there must be a reason for it. I think the reason is, one of it is to have more cash made available whether to individuals or to companies on an after tax basis. I think the second is that India has still not reached a stage on economic development where you can afford not to give some dedicated incentives to certain categories of companies or certain categories of regions. Take a simple example, forget about backward regions, forward regions, take your R&D or innovation

Q: Leave aside those specific kinds of exemptions.

Kapadia: You cannot do away those credits.

Q: Leave aside those credits - do you think that a simplification of the ways companies in this country are taxed is something on the cards that the government will address this Budget?

Kapadia: Undoubtedly. If you look ring fench two or three main exemptions which you may want to still give as a policy incentive relating to infrastructure or relating to innovation or R&D. You leave those aside. Certainly you can simplify things in a way that it becomes easier for companies to comply with a simpler tax rate.

Q: Many of these parallel tax proposals also provide loop holes for companies to use creatively - so do you really think India Inc wants a simplified tax structure.

Butani: I think we need more than simplicity, I think we need certainty. To elute on the point that Dinesh was trying to make. If you look at the history of surcharges, 1991 was the year in which we introduced a surcharge called the Gulf surcharge. I do not think since 1991 we have had surcharge going away. For some reason or the other the surcharge has always been there all for good objectives but certainly creating a level of uncertainty.

Q: This year maybe they might be toying with an infrastructure surcharges what I hear over and above the crude, petroleum surcharge that we pay.

Butani: Possibly yes. Then we had the introduction of the fringe benefit tax. I think what happening is that the effective cost of doing business in India is getting higher and that is an impediment for domestic investment and an impediment for foreign investment. Now whether he does it by eradicating surcharge or he gets rid of fringe benefit tax, I do no think that India Inc is really concerned about that. Effective tax rates have to go down because they are uncompetitive.

Q: To warp up this idea and respond to both your observations?

Kanabar: Both the observations are consistent so no need to respond to that. As you are aware there is a World Bank series known as Paying Taxes. It speaks about how each of the countries in the world ranks in terms of how they administer their tax laws. There are 161 countries which are ranked out there and it might come as no surprise to you that India is ranked as one 154^th.

Q: What is your bid idea for this Budget?

Kapadia: I think there was a suggestion made which was not followed up in all earnest after the elections. But I think we should give a very serious thought to binging unaccounted money into the main stream. Whether that unaccounted money is in India or outside India that to me is a secondary issue. Specifically talking about offshore money for instance certainly if we were to peruse that in a meaning full way, you have seen what's happening with Switzerland being pressurized by 70 countries which they have tax treaties to amend their double taxation avoidance treaty (DTAT) and allow  information to be given to the bilateral country. The point that I am making is that countries over the years have made a serious attempt to bring back their wealth and their funds into their country if necessary through an amnesty. There are moral repercussions, there are possibly constitutions repercussions.

If you take a country like Germany which has a very high tax rate traditionally, when they announce the amnesty few years ago they actually taxed offshore money brought into Germany as low as 25% rate. Now the point is why one is making this suggestion. We are talking about alarming fiscal deficits; it is nearly 10% now on a combined basis, Central and State Budgets. We are talking about rationalization of rates at the same time certain sectors of the economy wants benefits to be extended. The reality is that you do not want a situation where you are foregoing revenues but you have no ways to supplement that revenue through any measures. Now look at the tax GDP ratio as an example, while tax revenues have been increasing India's tax GDP ratio is still hovering around 16%, UK is 34%, US is 29%. Even if you exclude the agricultural part of the economy which is tax free, the tax GDP ratio is still not as high so we need to increase the tax base. So I come back to the point that to increase the tax base you have to bring the unaccounted part of the economy into the mainstream. If it is a one time measure like amnesty followed by very-very stringent administration of the tax laws. We have prosecution provisions in the incoming tax act which I do not think ever used for cases which deserve this kind of usage. So I think that is where a big change can come about if we have to really look at revenue shoring measures in a meaningful way.

Q: What do you think of that suggestion and really how politically feasible is it going to be?

Butani: I think it is an extremely noble objective and it makes perfect economic sense. However I am personally circumspect about implementation of an idea of that kind. There are a couple of reasons for that. Number 1, we are dealing with the set of stringent exchange control environment and if an amnesty is given in so far as tax aviation is concerned, then are we trying to say that the government will give an amnesty from exchange control point of view which is considered in our country as a larger economic offence than in elsewhere. Because Germany won't have exchange control regulations the kind of once that we have in India. The second aspect to remember is that last time when we had an amnesty which was the tax amnesty in 1997 the Supreme Court had issued a directive because in the Supreme Court the validity of such a scheme was challenged were it said that government should be more careful while implementing a similar scheme in the future because this is a disincentive for honest tax payer.

So I think in my view the ministry of finance would be extremely cautious and will also have on their top of their minds the Supreme Court directive on having such an amnesty. The last point is that our international conventions are standard conventions. We still have very little experience on how countries share information on residents who have defaulted in tax payments or with exchange of information has to be obtained. I know at a practical level it is very difficult compared to double tax treaty between Western European countries and North American countries where exchange of information is very robust. Such amnesty scheme works very effectively, very seamlessly because there is co-operation of governments taking place. So I think you are touching on something which is not just politically sensitive but I would say politically not implementable and more importantly practically difficult given the current set of economic laws that we have in India.

Q: Quick comments?

Kanabar: Couple of things. Just to elaborate on what Mukesh mentioned about the last amnesty scheme.

Q: That was a domestic amnesty?

Kanabar: It was domestic. What happened there was that public interest litigation was filed. Actually the government filed an affidavit to say that this is the last time they are bringing in amnesty scheme and they will not do it.

Q: Do you believe them when they say it is the last time?

Kanabar: I would like to believe as Mukesh mentioned if this went back to the Supreme Court. Supreme Court might like to have a very strict look at. The other thing which Mukesh mentioned I would like to just elaborate a little bit is within the existing scheme if there is an enough process available to get that information and do what we need to do. I had the benefit of reading the petition which was filed before the Supreme Court of India before the election and I have seen government rejoined to that. But what really happened was the governments counter to that really showed that the government is seriously looking at any event and taking those alternative steps. So I agree with what Sudhir says that we seriously need to try and see that we get the money back. I think he makes a very important point.   

Q: How possible is it going to be is a big question?

Kanabar: I think it is possible. The only thing which I believe is that maybe an amnesty scheme may not be the route really. The government needs to really have a dedicated task force which is going to go off after some of these countries whether it is Bahamas, really Switzerland and try and get that information and go after it as oppose to trying and possibly putting an amnesty scheme.

Q: Your response to what your colleagues have said?

Kapadia: Two things about the Supreme Court development. I think there are enough gifted legal minds both in the government and outside. Nobody in my view can commit future generations.

Q: Let us get down to the feasibility and whether you really want to do amnesty scheme?

Kapadia: The point is this; my suggestion was based on simple arithmetic. Today you get zero percent revenue on all this money. It is zero percent. If I can bring in something which gives, we can offer 20% or even 10%.

Q: Give a sense of what you are seeing the amount - there are no estimates of what these amounts could be?

Kapadia: Don't know really. But it is significant enough I am sure to as Dinesh says if there is a rejoinder from the government, my point is this, as far as the morality of this is concerned, it's a very unjust situation today also where people who earn salaries and corporates who have no other way but to report the income are being subject to full tax.

Q: Go on with your big idea for this Budget.

Butani: We need a new roadmap for managing a fiscal deficit, if you really look at the performance for the past five years barring 2008-09, the government has done a stupendous job in managing the fiscal deficit and bringing it to almost to the 3% level that they had targeted when they came into power and bear in mind that this was at a time when collation politics was far more pronounced and what happens in a collation politics is that you are under compulsions from your collation partners which puts a lot of pressure on you to manage expenditure. So there were no expenditure reforms, we had only revenue leading the race from managing the fiscal deficit. For reasons beyond anybody's control, it has gone haywire and now you have another five years, I think that you will probably see in this year's Budget, a new five year plan being laid down for managing the fiscal deficit, the challenge that is going to be there is that in the first two years when the government is in a mood to pump up the demand, have greater level of spends on infrastructure and have already brought down, the tax rates particularly on service tax or on excise duty, what is a government likely to do, you also have a situation where everybody is clamoring for extension of tax holidays but you will nevertheless see in new five year program, I think again you will have two strategies to be worked out, one is on expenditure reforms other is on revenue mobilization, you do not have the collation politics that you had in the past five years, so we may see some expenditure reforms, we may see some bank privatization and privatization of other public sector undertakings which would also play a role in managing the fiscal deficit.

Q: That's what the government will do, what is your big idea when it comes to maybe giving the government suggestions on maintaining fiscal discipline or living by the five year plan that they announce if they do announce one this Budget.

Butani: If you for a minute look at achieving the fiscal deficit through revenue and tax mobilization, I think we need to do far more in terms of streamlining the administration, we need certainty on tax rates, we need dispute regulation mechanism, we need a situation where the government is not laying a debt tap for itself so if we are going to account for taxes on cash basis, if we are going to have high-pitched assessments and collect taxes then really the government is laying a death trap for itself because all of these decisions if they are reversed by the courts in the future, the governments will have to refund this money to the tax payers and you are looking at merely postponing the fiscal deficits, so a combination of certainty on tax rates, long term fiscal policy on tax rates and dispute resolution in my view is going to help mobilize revenues for the future and help manage the fiscal deficit.

Q:  Many of the measures that Mr. Butani is talking about or measures that the tax fraternity is asking for a very long time, for instance in dispute resolution, the national tax arbitration council or all of that. So do you expect this Budget will really address those micro issues or do you think that they will lay out a broad plan that hopefully we will pray for the next five years that even that gets fulfilled?

Kanabar: Let me put a couple of thoughts out here, the government has set up a committee, the Kelkar Committee and this committee has set up a sub-group, just to look at international taxation and that group came out with some recommendations which are very simple and I am going back to the point which Mukesh raised regarding certainty and all that the group said was that there is an OECD commentary on how do you interpret tax treaties, come out with a position as to where do you agree or disagree because once you come out with that position, then people know what ot expect. So if the government disagrees with OECD, then there is going to be litigation, if it agrees to what OECD has said in terms of its interpretation, then you know that tax office will follow and you don't have an issue. Till today, that very laudable idea has not been acted upon at all.

Q: You are feeding into what my thought was which is that we need all these things we have been demanding them for five years but will the Budget deliver?

Kanabar: We are just forgetting a thing that having changing FDI regulations is not sufficient to get foreign investment, people come in and if they find that thereafter they have made investments, certainty is not going to remain, then the utopia  which we have thought that money is  going to come in nevertheless into India may not remain. I think the government just needs to understand, the government just needs to understand, that international taxation is an integral part of foreign investment policy.

Q: So this is a do or die situation, you have to address it now?

Kanabar: Yes you have to address it; you just cannot keep it open.

Q: Your comments on this.

Kapadia: To supplement further what Mukesh and what DInesh said, let's talk about the expenditure side, the previous government and the previous finance minister very early on made a mention that we are not only going to look at outlays but also outcomes, outlays are clearly going out, its commendable that the way social sector outlays have been allocated but I haven't seen anything to tell me what have been the outcomes.

Q: Both of your colleagues seem to agree with you but what is the realistic expectation that the many things that you mentioned on the fiscal discipline side will actually be met with this Budget, outside of course laying out a five year plan, that's an easy one to do isn't it?

Butani: I am not focused on the legislative part of the Budget, I am more focused on the intents and the statements of intents are very important, in my view, statement of intent will lay down what is going to do for the next five years and more importantly another important point is that look at the new tax code, we have a tax code which is almost five decades old, we have been promised that we will see a new tax code or a working paper, so I would certainly like to see a statement of intent in this years Budget that the new tax code or the working paper is going to be seeing the light of the day.