Finance minister P Chidambaram held a pre-Budget consultation with state finance ministers and industry chambers on Wednesday. The issue of proposed Goods and Services Tax (GST) figured prominently in the Union finance minister's meeting with state finance ministers, as the Centre is keen on early implementation of the tax regime.
Later in the day, Chidambaram met representatives of leading industry chambers CII, FICCI and Assocham. With factory output slowing amid high interest rate regime, industry is seeking steps to improve investment climate and boost business sentiment.
CII chairman Adi Godrej and FICCI chief Naina Lal Kidwai explain to CNBC-TV18 that they suggested the finance minister ensure lower interest rates and make no changes in the tax structure to enable growth and investment.
Below is an edited transcript of the discussion on CNBC-TV18
Q: The emphasis at the meeting with the finance minister was on what the Budget should not do. Is India Inc bracing itself for an inheritance tax or a tax on the super-rich this time around as planned by the Parthasarathi Shome -Chidambaram duo which has gained reputation for the introduction of new taxes?
Godrej: We have very clearly said that such a tax would have an adverse effect as it would create a negative perception that leads to negative trends on investment similar to the adverse effect created by the General Anti Avoidance Rules (GAAR) and Retrospective Amendments by the previous Budget.
I specifically mentioned at the meeting that inheritance taxes do not generally exist in the developing world. They are a phenomenon of the developed-world which is trying to get boost growth from 1 percent to 2 percent.
Q: Do you believe given the current situation that the finance minister may in fact consider implementing the inheritance tax in this Budget? Could this be the red herring just like the Retrospective Tax in the previous Budget?
Kidwai: All members of industry suggested there be no increase in income tax (I-T), wealth tax or inheritance tax. Instead of taxing inheritance or wealth, it is important for the government to ensure savings, investment in entrepreneurship and the development of new projects.
One of the industry chambers pointed out, inheritance tax is very much a developed-economy phenomenon. Apart from Turkey, no other developing country has an inheritance tax. The common refrain was- 'Don't disturb the tax structure'.
Q: Is industry bracing itself for both higher excise and service tax rates?
Godrej: No, not at all. We think it would be a very bad idea to increase excise duty or service tax rates in this Budget. The expected central rates under a GST regime should be either at the current 12 percent or 10 percent. But certainly not higher.
Q: Do you believe the Constitutional Amendment on GST will be moved in the Budget Session?
Godrej: I don’t think the Budget will announce it. The GST would need a Constitutional Amendment in the Budget Session.
Q: Given the fiscal and the political compulsions regarding the last Budget before the general elections, do you have any expectations from the Budget?
Kidwai: There are many areas which can be addressed and some of those have to do with tax administration. For example, transfer pricing. The IT sector, which is worth USD 100 billion today, is a significant contributor to the GDP. While plans are formulated to put manufacturing and investment back on the agenda, we cannot ignore IT's contribution to economic growth - 70 percent of all global litigation and transfer pricing relates to India. The government should be sorting out the problems affecting the IT sector and ensure that our natural advantage in IT remains.
The meeting also looked at certain industry areas. The Federation of Indian Chambers of Commerce and Industry (FICCI) touched on real estate which is important because housing is often seen as a sector that leads to growth. Housing is viewed by economists to indicate growth. It is a big employer and boosts the cement and construction industries. Since low-cost housing is an urgent need, FICCI recommended a certain focus and push for low cost housing.
Q: Given this fiscal constraints, do you really believe the finance minister can bat for growth and revive the investment cycle in the light of worries about the political constituency as well?
Godrej: There is no question that he is in a difficult position but the best way to tackle this difficult situation is to collect more taxes through higher growth, not through higher rates of taxes. India has never been successful in increasing rates of taxes whether direct or indirect. In fact it has been the other way round. So, we have not asked for a reduction in excise duty or service tax, but clearly stated that there should be no increases either.
Q: There seems to be a feeling that the government is more focused on attracting FII inflows and foreign capital as indicated by the finance minister organizing road shows abroad. Is industry getting a sense that there isn't much reward in attracting domestic capital with the domestic economic climate yet to kick-in?
Godrej: Domestic investment in terms of numbers far outshadows foreign investment. So, we were very clear that various policies should be directed to encourage domestic investment and economic growth.
Q: The Reserve Bank of India governor commented that inflation continues to be above the RBI’s comfort zone and hence there was little to expect from the monetary and fiscal stimulus. This has spooked the street. What do you expect from the central bank when it announces its monetary policy at the end of the month?
Kidwai: I am not surprised that the governor continues to be cautious because while while inflation come down, the decline has not been significant. Segments like food inflation have actually gone up. However, I believe a lot of the food inflation is due to inflation in the supply side and not by demand.
There is a great need for better logistics, better distribution and better warehousing. All this is not going to happen in a hurry. High interest rates are hurting industry very badly and the expectation for a signal for a cut in interest rates is widespread.
I am sure that the governor has considered these notes of caution with a view to managing expectation, but maybe a small reduction of 0.25 bps will not be out of place. I am certainly hopeful that on January 29 there will be something. Industry needs those green shoots of investment back on the agenda.