In an interview with Doordarshan News, Finance Minister Arun Jaitley said the fiscal deficit slippage this financial year (2017-18) was largely statistical. He told A K Bhattacharya that the glide path of the economy would remain consistent. Edited excerpts:
This is the first time that you have slipped in meeting your fiscal deficit target. How do you explain the slippage and what is your year-wise road map for the fiscal consolidation programme for the next few years?
You can theoretically use the word slippage, but essentially it is substantially statistical. For a 12-month year, my direct tax revenue is for 12 months. But this being the first year of the goods and services tax (GST), it is only 11 months, and because of this, I am inherently Rs 360 billion short. Conventionally, excise duty, value-added tax (VAT), and service tax were collected in the same month in which the liability arose. Under the GST scheme, you collect your tax by the 20th of the next month.
So the GST for the month of March 2018 will be received in April, which will be counted in the next fiscal year. So, one of the principal reasons for the slippage is statistical. Besides, the non-tax revenue was also short because the telecom spectrum auction was deferred. I have covered a large part of that through higher direct tax and record disinvestment. It (the fiscal deficit) should have been 3.2 per cent but it is 3.5 per cent. As far as the future road map is concerned, despite expanding expenditure, it will be 3.3 per cent for the next year, 3.1 per cent thereafter, and 3 per cent in the year after that.
The glide path will remain consistent, and this year can be regarded an aberration, partly because of statistical reasons and substantially because of the GST switchover.
Given the geopolitical conditions in the Indian sub-continent, would you say that the expenditure rise on defence could have been a little more?
I certainly believe that defence needs more money; then I think we are in a Catch-22 situation, given the amount of revenue that you get, how much tax are you able to realise? This year, the surprise package is going to be the GST. Just as income tax got us out of the situation last year, I feel the GST will save us now. From today onwards, the anti-evasion measures are being put in place and once these measures are in place and the GST collections get bumped up, I think I would be too willing to make available for defence whatever extra is required.
You have taxed the rich; you have not reduced tax for big companies. You have also introduced long-term capital gains tax on equity. Can you explain your taxation philosophy?
The road map is to eventually bring down the corporate income tax to 25 per cent. This is because of competitive reasons, as there are countries with 15 per cent, 18 per cent, 20 per cent, and 25 per cent, and we are competing with those countries, and investors have that choice. Therefore, why should they invest in a country where the tax rate is 35 per cent or 40 per cent, when you have a choice to go to a 20 per cent country?
Last year, I took the first step by reducing corporation tax on small companies with turnover of Rs 500 million; this time, I have taken that to Rs 2.5 billion, so that the entire small and medium enterprises are covered.
I am gradually moving upwards and out of the 600,000 companies. I have covered 593,000. The 7,000 companies that are out of it will not always be out of it. These are companies that avail of all the exemptions and the actual rate in effect is 20-22 per cent. As the sunset date keeps approaching, we will do away with the exemptions.
On the long-term capital gains, there was a time when we wanted the Indian markets to grow, we needed investments in equity to come in, and therefore we needed our double-taxation treaties, which we had with Mauritius, Cyprus, and Singapore. But, these treaties were also leading to round-tripping of money.
By 2015-16, we realised that we were strong enough and we didn’t need to encourage this institutionalised round-tripping of money. Therefore, we decided to renegotiate those treaties. Even while we were renegotiating it, we were told that foreign investment would go down but nothing of that sort happened as the domestic economy is fundamentally becoming stronger.
Similarly, as far as long-term capital gains is concerned, if we go by the numbers Rs 3.67 trillion is the profit of the large investors — international and domestic — mainly corporate investors. These are very wealthy investors who have brought in equity to the market in such huge amounts and not a rupee of tax is paid. Is it equitable that Rs 3.67 trillion is what you earn in a year and don’t pay tax?
Therefore, somebody had to bite the bullet and this was the most appropriate moment for it. I think the investors themselves also knew that sooner or later that was coming, but I also wanted to be fair to those investors. I didn’t want to commit the mistakes my predecessors had done and have a retrospective effect. Therefore, I suggested that whatever they had earned in India till yesterday will be protected. Any profit earned thereafter from the sale of equities would be subject to a 10 per cent tax.
The capital expenditure in the current year fell by 11 per cent. Next year you have budgeted for a 10 per cent rise. Is there a scope for a further increase?
Capital expenditure can come from extra-budgetary sources. For instance, the IEBR. Capital expenditure keeps the economy going. We would be happy if we can give more to the railways to spend.
Just an observation. There was no big reform announced in this Budget...
Over the past four Budgets I have announced several big steps. So, as we see it, and I have said this before, this year is the year of consolidation.
Coming to the point of tax rationalisation. You seem to be disenchanted with the business person’s tax compliance. Is there a signal there?
Disenchanted is a strong word. The idea is to nudge people to pay taxes and you nudge them in different ways. The fact that we reached a tax base of 80 million people is no mean achievement. So, on the business side, I have done various things to nudge them such as presumptive taxes and the GST, and so on. But both in terms of direct and indirect tax collection, the quantum of tax collected has been inadequate.
There was a lot of expectation and fear also, since this was the last Budget of this government, that it would be a populist Budget. What is your assessment? How has the Budget performed on that score?
Let me put it this way. The Budget also reflects the conviction and mood of the Prime Minister. One thing the PM is convinced about, and he declared that some days back, is that he doesn’t believe is momentary populism. So there are two items in the Budget that would have huge social impact — the exemption of interest income on bank deposits for senior citizens that has been raised to Rs 50,000 and the National Health Protection Scheme. Whether that is populist or it is his social philosophy... I would say it is his social philosophy, without abandoning the fiscal discipline.
Health care and social spending is a big thing for this Budget. The focus is legitimate. Do you have a new expenditure programme in mind? Because when I look at the figures, the allocations do not seem too huge. For example, the increase in health care allocation is only 3 per cent compared to 36 per cent this year, agriculture it is the same 13 per cent, education 1.4 per cent compared to 19 per cent.
When you go by percentages the differences don’t seem so large. In percentage terms the figure might be less, but the overall size of the expenditure also increases. So the spend is larger even if the percentage is the same. As far as the new schemes are concerned the government will undertake whatever expenditure is required.