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Budget 2018
Last Updated : Jan 11, 2018 03:50 PM IST | Source: CNBC-TV18

Budget 2018: Credibility of Budget numbers should be maintained, says M Govinda Rao

Top economists meet Prime Minister (PM) Narendra Modi at the Niti Aayog - a seven-member committee recommends bringing back a long-term capital gains tax (LTCG). In an interview with CNBC-TV18, M Govinda Rao, Former Economic Advisory Council to the Prime Minister (PMEAC) discussed the same.

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Top economists meet Prime Minister (PM) Narendra Modi at the Niti Aayog - a seven-member committee recommends bringing back a long-term capital gains tax (LTCG). In an interview with CNBC-TV18, M Govinda Rao, Former Economic Advisory Council to the Prime Minister (PMEAC) discussed the same.

Had groups giving views on macro balances, agriculture, employment, education, urban infrastructure and related issues. People who had assembled were divided in these groups, he said.

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Economists recommended to PM that the government should stick to the fiscal deficit target and there has to be credibility in the government budgeting, he added.

On LTCG he said that the objective of a tax policy is to raise revenues, it is not supposed to seek 100 other objectives.

There has to be neutrality in taxation, between debt and equity. If the debt is being taxed, equity should also be taxed, said Rao.

The credibility of Budget numbers should be maintained. When you overestimate revenues and underestimate expenditure, it creates a huge problem not only for the center but also for the states, he further mentioned.

Below is the verbatim transcript of the interview.

Latha: what were the key recommendations?

A: It was not a seven-member committee, it was a group. There are almost 40-45 people and they were divided into six different groups and each group had a specific team. The first group was on macro-balances, the second one was on agriculture, the third one was on employment and then there was one on urban infrastructure and related issues, one on education.

So these are six groups and these 45 people who had assembled were divided into these groups and the first group was on macro balances as I mentioned, it consisted of 7 people and there was broad unanimity on the way in which the government should deal with the macro issues.

Latha: Can you tell us the key recommendations that were given to the PM?

A: The most important recommendation in my view is that the government should stick to the fiscal deficit target and there has to be credibility in the government Budgeting.

In the sense that – one of the things that one could do is to have a fiscal council appointed. The fiscal council appointed by the parliament and reported to the parliament, not to the finance ministry as was in the MK Singh committee recommendation and then, of course, the issues for significant revenues can be mobilized through disinvestment.

Sonia: On the taxation front you were telling my colleague Shereen Bhan last night that the group has recommended imposing LTCG, I just wanted to understand the rationale behind that because the common opinion suggests that if the government is looking at revenue optimisation then there are other methods to do that and not tax on long-term capital gains and at a time when the global economies like the US, etc are bringing down tax rates, at such a time it doesn’t look like it would be favourable for India to tax LTCG, your own view on what the group suggested and the rationale behind that?

A: There are two parts to it. First one is that if the world is bringing down the tax rates and we said that the government should implement the announcement made in 2015-2016 Budget that tax preferences would be rationalized and corporate taxes would be brought down to 25 percent. So we are on that and on the other issue on the LTCG, my theory tells me that the objective of the tax policy is to raise revenues. It is not supposed to seek 100 other objectives and in trying to influence the investors’ choice between different financial assets is not one of them.

You have financial assets and why should the tax policy influence the investor’s choice between LTCG in debt and equity related issues? If you are taxing debt, why are you not taxing equities? There has to be neutrality in taxation.

Latha: That was one of the key recommendations, to impose the tax?

A: Obviously, we have been doing too much of distortions by taxing some financial instruments and not taxing others. If the objective of the tax was to influence the investors’ decision on tax – what instrument you should buy, I think we should be rational.

My theory tells me that that is not the objective and therefore we said that -- it is not the question of equity. Only 2.5 percent of the population pays income tax. What equity are we talking about?

Sonia: I also wanted to ask you if there was any discussion on securities transaction tax (STT) and whether that would be brought down if the holding period of LTCG has made two years instead of one?

A: In the short time that we had, we did not discuss that issue. So there was no reference to that particular thing.

Anuj: If we have STT then there should not be LTCG or if we have LTCG then STT should be done away with, we cannot have both, right?

A: Obviously. The question is here is a very glaring issue and there are many other infirmities that we have in the tax policy.

The objective tax policy should be to raise revenue and some amount of equity – you cannot take revenue from the poor man but at the same time, more than the number of objectives you have, more the distortions you try to create.

Latha: Can we say the key takeaways were, maintain fiscal discipline, look at taxing LTCG on shares, any other?

A: Most important is restoring the credibility of the Budget. When you overestimate revenues and underestimate expenditure, it creates a huge problem not only for the centre but also for the states.

That is the reason why we set a fiscal council because that would bring about a certain amount of checks and balances in forecasting methodology and monitor the fiscal deficit at the centre.

India Union Budget 2018: What does Finance Minister Arun Jaitley have up his sleeve? Click here for live Budget 2018 news, views and analyses.
First Published on Jan 11, 2018 10:45 am
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