Pre-budget meet: What was discussed?

The run-up to the Union Budget has well and truly begun. The Finance Minister today met eminent bankers from across the country and later met economists to discuss their wishlist for the upcoming Union Budget.

In an interview to CNBC-TV18, former general secretary of Ficci, Rajiv Kumar says inheritance tax was not a minority proposal in the meet. "Widening of the tax slab was discussed," he adds.

Also read: Sub-5% economic growth likely warns Arun Maira

He further says massive expansion of the tax net is possible. According to him, it is unlikely to get FM's response in such meetings and rightly so
FM, he says, wants investment cycle to restart.

Below is the edited transcript of Kumar's interview to CNBC-TV18.

Q: Let’s get the inheritance tax debate over and done with. Were you in the minority, in terms of the number of economists actually opposing to the Finance Minister that there should be an inheritance tax brought in?

A: Not at all. It would be unfair to say that this was a minority proposal. There was a general acceptance and support for this proposal by several economists today quite explicitly. The idea was that, at this moment when the government has to show that it is not going to be either populist or going to succumb to pressure from some different segments, this would be a good step to take. This has to be seen in the perspective of all the other suggestions made by the economists today, like increasing the tax base, improving tax compliance, trying to improve efficiency expenditure and several other things. So, I don’t think it is fair to focus just on that. 

Q: What was the response that you actually got from the finance minister and the finance ministry officials on inheritance tax? Was the inheritance tax an option that the finance ministry was seriously mulling for this budget?

A: In these meetings, you never get a response and rightly so, because the finance minister or the ministry officials would be doing a very wrong thing if they gave us any response. They listen to it and then they make notes of it and they ask a couple of questions about rates and cut offs etc. However, I can’t second guess the response at all.

Q: So could we perhaps see the inheritance tax making its way into budget 2013-2014?

A: I wouldn’t bet it either way at all, this is something along with everything else. However, the finance minister is in a very difficult situation. A number of economists said that they don’t envy where he is, because on one hand this is the last budget before elections whereas, on the other hand the fiscal situation is so tough that he cannot be seen to make a populist budget. Therefore, he has to think of measures which will improve his revenues while at the same time, allow him to increase expenditures where he thinks will get him the political mileage.

Q: On the topic of widening the tax base, there are talks of the introduction of a new tax slab. What was the sense from economists on that?

A: There wasn’t a mention a new tax slab. It was more of a question of widening the slab. There are 125 million non-agricultural households of which we can assume that 40 million households are below the poverty line. Another 35-36 million pay the tax. If one assumes that 20 million are below the exemption limit that still leaves about 30 million households which are not within the tax net. Assume also that all the 35 million who pay the tax are representing individual households, which obviously is an overestimate. So, the point that was made is that there is a massive expansion of the tax net possible. Also, it is shocking to know that only 1.4 million tax payers declare their incomes to be Rs 10 lakh in this country.

Q: Do you believe we are going to see the introduction of new taxes this time in this budget?  What is your view on what we can expect this Budget?

A: I don’t think we should expect a Christmas Tree. Not from this minister, not in the place where the economy is, not where he is. The one strong message that was given out by the economists today was that if at the end of his budget speech people came out  and cheered for a ‘Christmas tree’ for the populist budget, then the credibility of this government would be lost. The single most important point that he made at the beginning of the meeting was that he wanted the investment cycle to restart and investment to pick up again. He knows that the one thing that you need to do to restore investor confidence, is to show that you are serious about getting the fiscal position right.

I don’t think we will see that. Therefore, we might well see some innovative measures. However, what everybody opposed was that the raising of the tax rate at the highest levels, which I believe the Chairman of the Prime Minister’s Economic Advisory Council has hinted at and every economist there said that that was really a bad idea.