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FY16 direct, indirect tax evasion was Rs 71,000 crore
May, 31st 2016

Fiscal consolidation and going for growth is a balancing act, said Arun Jaitley, Finance Minister, in an interview with CNBC-TV18.

The Finance Minister was speaking from Tokyo where he has gone on a six-day visit to woo investors.

Admitting that he would have been happier to have made headway in the Goods and Services Tax (GST) Bill, he said India had an image of a country with unreasonable taxation. But those fears have been put to rest, he added.

"We are giving an opportunity to Middle India to save more," he said.

Jaitley reiterated what he has been telling India media saying that the GST has been blocked by one party and that he will put it to a vote, all things failing.

The taxation integration that will happen through the GST Bill will be beneficial on a lot of fronts.

GST will allow seamless transfer of goods and it will also remove tax on tax, Jaitley said.

In the last fiscal year, direct and indirect tax evasion was about Rs 71,000 crore, he said.

Analysts estimate that the gross domestic product of India will grow over 1 percentage when the GST Bill gets implemented.

A clear winner will be both Centre and states who will see their taxation revenues increase, he said. Jaitley clarified that an overhaul of taxes won't result in higher taxes.

"It will strengthen our abilty to rationalise the taxes."

He also spoke on the Bankruptcy Law which was recently passed.

Below is the verbatim transcript of Arun Jaitley’s interview on CNBC-TV18.

Q: Two years on how would you characterise the pace structural economic reform in your country?

A: It is extremely important what all has happened. Its directional and I would term it as the second generation reforms which were already delayed. The point to be flagged really is that step by step, almost week after week we have been coming out with some step or the other, but what is important they are all aimed in the same direction. So, cumulatively it comes out as a very large package of reforms and it is not complete as yet.

Q: What is the most pressing policy priority is it fiscal consolidation or going for growth?

A: It is a balancing act. I don’t think you can detach the two from each other. We can’t claim to be an important emerging economy. The fastest growing major economy in the world, benefiting from oil prices and then say consolidation is not possible. So, we have to balance fiscal consolidation along with growth. In the past two years we worked in that direction.

Q: Taxation and the goods and service tax (GST) bill are you where you want to be two years on?

A: I would have been happier if we had made a lot more headway. As far as direct taxation is concerned there was a lot of baggage that the last government had left behind. We had an image of a country which taxes retrospectively. We had an image of a country where there is unreasonable taxation which has eventually never able to sustain in courts. We had unpredictability and therefore our taxation was not exactly giving us the right image which should help in emerging economy.

In the past two years a lot of those fears have been set at naught. We have said good bye to the whole idea of retrospective taxation. Those who were at the receiving end of the retrospective taxation we have given them various options from the legal option to a settlement options and so on and the ball is really in their court.

Additionally, as far as direct taxes are concerned we have given repeated opportunities to people to come out clean, to resolve all disputes so that we don’t have litigations and tax arrears pending in courts. What is most important is that the two-fold steps we are taking one with regard to middle India we are giving an opportunity of saving more and therefore various kinds of incentives are given.

As far as the corporate India and corporate investors globally are concerned, we are giving them a cleaner taxation system phasing out all exemptions and eventually bringing the corporate tax rate down to 25 percent. Therefore with this kind of predictability I think we are moving in that direction and hopefully in the next two to three years, we would have covered a lot of headway in this.

As far as the GST is concerned it has been passed in one house of parliament. It was blocked by one party in the other house and I do hope in the next session it makes a significant headway.

Q: Why do you feel it is proving so hard to garner cross party support for the GST?

A: It is not proving hard to garner cross party support. Almost every political party in India supports GST. All state government support GST. For reasons which are not tax related but reasons which are political one party blocks parliament every time GST comes up. Since, we would prefer to implement it with consensus I have been trying to persuade them. I hope I succeed and if I don’t then I will have to resort to the last option of putting it to votes and I am reasonably confident the numbers are on our side.

Q: Do you think that you have the numbers and the political capital from parliament to pass the GST bill and if so when do you think you can pass this?

A: I hope to push it through in the next session and as far as the numbers are concerned I don’t think there is any significant opposition we have to the idea of GST. Almost every regional party, all parties which otherwise don’t support the government supports the idea of a GST and the bill in its present form. All state governments in India have approved the present format of the bill.

Q: Talk us through if you can and elaborate on how tax harmonisation will impact businesses, the industry broadly, the consumer and ultimately how is going to affect tax revenues and collection?

A: India has a large population, one sixth of the world’s pollution. We have a very large middle class and therefore a very large consuming class. In a Federal Polity in India the centre has its own taxation, the states have their own taxation then you have local taxes etc by bodies. As a result of which the taxation integration of India has not taken place. Therefore, to transfer goods or services across the country without hurdles is not possible.

The GST will make India in to one big market, probably one of the largest single markets in the world. It will allow a seamless transfer of goods and services that is the second advantage. The third advantage of the GST will be that today at every stage where from manufacture till the sale various centre and state taxes takes place. The next component of tax includes a tax on tax already paid. I think that will get eliminated. So, there will be no tax on tax.

Goods and services will be cheaper. Evasion will be difficult because at any stage of the value chain if a particular product comes within the IT network that we have then at a subsequent stage to evade taxation will be very difficult.

Q: If I can ask you how much do you believe the federal government is losing in tax receipts from tax evasion?

A: From tax evasion we lose a lot.

Q: How much?

A: I will not quantify it. For example, last year itself, an amount of Rs 71,000 crore in direct and indirect taxes which was being evaded is what we have detected. Now, the ones which we have not been able to detect would be much large and therefore evaded tax does not come within the structured economy and therefore the more the taxation, the greater will be our ability to lower the rates of taxation. As a result of which goods cost less, services cost less, the gross domestic product (GDP) itself gains. Now economic experts believe that 1 or 1 percent plus growth in the GDP can be contributed by the GST itself. Now these are the various advantages and what is most important is that the consuming states are going to benefit extensively which means that an interstate equity also will be enabled with the GST coming into force.

Q: If I can ask you, how much in terms of ultimately tax revenue collection, receipts, is the federal government going to see once this is all implemented and the challenges in the implementation, do you have an outright figure that you can give us?

A: I will not hazard a guess, but I can say that taxation revenues of both centre and states would increase.

Q: Does overhauling the taxation system necessarily mean higher taxes if you are putting the emphasis on fiscal consolidation?

A: it does not mean higher taxes. If more people come within the tax network, if more goods come into the tax network, it will strengthen our ability to rationalise the rate of taxation itself.

Q: Let us move on to another issue and that is the new bankruptcy law that was passed this month. What does it mean for the insolvency regime in India and to what degree do you think it will help the state banks recover their dues?

A: In India, our old insolvency and bankruptcy laws were very obsolete. Those relating to private individuals and partnerships were almost non-functional, very ineffective. Those relating to companies were scattered in various ways. There was a provision in the Companies Act. There was a provision in the Sick Industries Act and so on. And functionally, these were not very effective and therefore for any investment to get struck in these failed companies. To exit out of those companies or for the investor to exit out was extremely difficult, you would lose the investment. This reform was already belated, it was long overdue. This has now enabled the banking system in India and other creditors to actually take possession of the assets of a failed company. You won’t allow those assets to evaporate and disappear. You take and then you recover the best possible recoveries that you can make yourself.

Q: If I could ask you the recovery right for creditors in the Indian Insolvency stands at around 25 percent as I understand it, so that figure should in theory go up?

A: It will go up because see along with Bankruptcy Law, there are several other regimes which we are creating. There is the securitisation law which enables the banking and financial institutions to take possession of the assets. There is the Debt Recovery Tribunals (DRT) where we have changed the entire procedure, where actual recoveries are going to become much easier and much faster and therefore the entire regime is going to empower banks and financial institutions to actually get a stronger hold over assets of a failed company which is a debtor, which has a commercial insolvency.

Q: So the recovery right should improve from the 25 percent that its stand right now?

A: It certainly would improve, it certainly would improve.

Q: And over the course of time once the Bankruptcy Law takes effect, where do you see it going and what’s your target?

A: I won’t give a figure because the banks today are also facing a situation arising out of a slowdown in some sectors where the banks are recovering and as the sectoral improvement takes place coupled with the legal regime which is empowering the banks the together the two can enable banks to recover faster and become stronger.

Q: Can you give me your estimate of the scale of the bad debts that is weighing down especially the state banks, the banking system at large?

A: If you look at the figure of non-performing assets (NPA) this figure existed. It’s just that the banks had not provisioned for it. The Reserve Bank of India (RBI) has now insisted and the government supports the RBI that we must know the extent of the problem and therefore the provisioning must be done. Tomorrow if these sectors improved and the companies covered under this sector are in a position to start paying interest and thereafter start returning the money, then obviously a situation can come in where many of these NPAs – I hope that will become performing assets. So each bank has declared its own figure and the figure is merely or almost I would say closer to the peak of those NPAs along with the provisioning. It is not necessary that these NPAs will indefinitely continue to be NPAs. Some of them would be reverted back after they become more performing, but at least we know the magnitude of the problem.

 
 
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