Speech focuses on tax reforms.
WASHINGTON, DC: Finance Minister Arun Jaitley, in Washington to attend the spring meetings of the International Monetary Fund and the World Bank Group, spoke at the Peterson Institute for International Economics April 16, on “Tax reforms in India: vision for the future.”
The following text of the speech was distributed by the Embassy of India in Washington, DC.:
President Adam Posen and Distinguished Guests,
It is a pleasure to be here, speaking at one of the best think tanks in the world, possibly the best on international economic issues, which has made many important contributions to policy-making through high quality research and smart communication. We in India need more such institutions.
I am delighted to be here at this important time for India which is attracting the attention of investors and policy-makers around the world. India, as you know, is one of the bright spots in the economy because of the reforms we are undertaking and its rising growth prospects.
In my remarks today I want to spell out a tax vision for India. I am aware of the fact that tax related issues have been high on the minds of investors in India and abroad and I want to address them but before I do that I would like to provide some background on the Indian economy and reforms. In doing so, I want to address the question of what and how much my government has done.
In late 2013, India was teetering on the edge of a macro-economic crisis:
- inflation was at double-digits, the current account deficit at 4 percent of GDP, growth was decelerating sharply, investor confidence was evaporating, capital was fleeing the country, the rupee was plunging; fiscal deficits were high; and India was reeking with the odour of corruption scandals and weak governance.
Now let us perform the following thought experiment. Supposing then (in late 2013) you had said that within 12-18 months, the following would happen:
- inflation down to 5 percent; current account to less than 1 percent of GDP; growth starting to accelerate to over 7.5 percent; foreign inflows of over $50 billion
- all petroleum-related energy prices had been deregulated
- -the world’s largest problem of financial inclusion successfully implemented
- agreement secured on implementing the goods and services tax (GST) about which I will speak later;
- bills passed to reform the coal and mining sectors and open up the insurance sector to FDI;
- a budget passed which reinivigorates growth by emphasizing public investment while maintaining fiscal discipline and protecting the vulnerable;
- direct benefit transfers were being implemented based on what the Economic Survey has called the JAM number trinity;
- the word “scandal’ had ceased to be part of the popular discourse (depriving journalists of their main source of sustenance and occupation!!) because major resources like spectrum and coal had been transparently auctioned;
- an onerous land acquisition bill was being rectified to reduce the costs of doing business;
Your response would have been a cynical laugh! Few would have believed this possible.
And yet that is what this government has achieved. And I have not even listed all the actions.
True, this is the beginning of a long process and we have a lot more to do which we will do.
But I hope you can see how much we have done. I think it is fair to say that fundamentally we have restored faith in government and its ability to push the Indian economy toward the path of sustained double-digit growth which is our medium term goal.
Let me turn to the tax vision for India
III. Tax Vision
III. A Objectives
The fundamental dilemma about taxes is that they are both necessary and problematic. Managing that trade-off requires good economics and better politics.
Taxes should promote savings and investment and hence growth;
Tax policy and administration should incentivize compliance. They should be administered fairly, transparently, with minimum discretion, with no harassment of taxpayers but also ensuring that tax evasion is dealt with firmly
The tax net should be wide so that all citizens feel they are part of government; but rates should be low because taxes after all forcibly transfer money from citizens to the state
To achieve these objectives my vision for India is to have a modern 21st century system for
- Indirect taxes
- Direct taxes and
- Tax administration
III. B Indirect Taxes: GST
For ten years we have been saying GST is about to be implemented. We have done it. We will pass the bill in Parliament in the coming 3 weeks.
GST is a modern tax, a consumption-based value-added tax, and a tax that avoids tax cascading
Create a broad tax base and will strengthen revenues going forward; increase the tax-GDP ratio
Promote transparency and reduce corruption because of the paper trail (necessary for claiming input tax credits) it will create;
Go toward creating an Indian common market because it will replace a number of state-levied taxes
There are estimates that implementing GST will increase growth by 2-3 percent in the medium term
The constitutional amendment bill contains the key provisions. We aim to secure legislative passage within the next three weeks in the center after which it will go to the states (2/3rd of the states will need to ratify).
The aim is to make the base as wide as possible. We have promised compensation for 5 years to the states (tapering in the last two) for any loss in revenue.
We have a GST council in which all the states and the center are represented. Very democratic governance and voting structure. Decisions require xxx percent of the vote so that center cannot on its own ram through decisions.
GST council will take a number of decisions relating to the revenue neutral rate. We will aim to keep the rate competitive close to international levels and minimize exemptions.
Technical preparedness: Aim to implement by April 1, 2016. The technology backbone is being put in place through GST-IN. Are states prepared?
III. C Direct taxes
Our direct tax system needs to catch up with our modern GST system
Currently we have in some ways the worst of both worlds: high marginal corporate taxes (35%) but low effective collection (22%). We create the perception of a high tax country and yet do not collect commensurate taxes. We need to change this to promote investment and growth. At the same time we need to create incentives for savings.
Accordingly in this budget we have announced important corporate tax reform to reduce rates, and broaden the base by eliminating exemptions.We are acutely conscious that capital chases destinations with the cleanest tax systems and competitive tax rates. The ASEAN average corporate tax rate is about 21-22 percent. Accordingly, the corporate tax rate will come down from 30 to 25 within 4 years, beginning 2016.
We are introducing this next year to give companies sufficient time to adjust. We do not want to surprise taxpayers.
A long standing demand of the US financial services industry, for allowing foreign investments in alternative investment fund (AIF) structured has been introduced in the Budget. Moreover, income of the AIF shall have a ‘pass through’ status, and such income shall be taxed directly in the hands of the unit holder as if the investment was made directly in the investee company. Similarly, the capital gains regime for real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) has been rationalized, with the rental income earned by REITs having been given a ‘pass through’ status.
To simplify procedures for domestic companies to attract foreign investments, this budget does away with the distinction between foreign portfolio investments (FPI) and foreign direct investments(FDI), and replace the separate ‘carve-outs’, which were hitherto in place, with composite caps. This move is expected to attract more portfolio flows in the near to medium term in debt as well as equities.
The income (capital gains) of FPIs will not be subject to minimum alternate tax (MAT).
To promote offshore funds, it has been proposed that the activity carried out through an eligible fund manager located in India shall not constitute a business connection for being taxed in India. This clarification will help in relocation of fund managers in India,
from Singapore and other such destinations.
We abolished the wealth tax and replaced it by taxes on the super-rich: the top personal income tax on the highest income earners in the country has also been enhanced by 2 percentage points, as a measure of making the tax administration more equitable and progressive.
We have increased the exemptions limit for savings
III. D Tax administration
Finally, let me turn to the area that has exercised investors, especially foreign investors the most: tax administration. I am acutely aware that there are concerns about retrospective taxation, tax harassment, unpredictability and arbitrariness in tax administration especially relating to transfer pricing (The ongoing project of the OECD on “Base Erosion and Profit Shifting (BEPS)” shows that transfer pricing, and tax-hopping and shopping by MNCs are a global concern).
Let me emphasize that we are absolutely committed to a transparent and predictable tax regime; there will be no retrospective actions and we will see taxpayers as partners not as potential hostages or victims.
These are not expressions of intent. We have translated them into action.
Even before this year’s budget we had:
On retrospective amendments, constituted a High level Committee to ensure fair treatment of such transactions.
Changed the Transfer Pricing method for taxation of R&D centers from Profit-Split method to cost-plus method,
Introduced safe Harbour Rules with specified margins on a broad spectrum of sectors without any limit on transaction values
Introduced Advance Pricing Agreement (APA) provisions to give taxpayers the option to seek tax certainty in transfer pricing transactions , and thereby enhance taxpayers’ confidence on Transfer Pricing Issues.
Ensure more speedy redressal of tax disputes before appellate /judicial authorities (In order to reduce litigation several measures have been taken. The mechanism of Dispute Resolution Panels (DRP) has been put in place, the scope of Settlement Commission and Authority for Advance Rulings (AAR) has been expanded with opening of new benches of AAR . Further, the tax authorities have been instructed to be decisive and not to file frivolous appeals in a routine manner).
In this year’s budget:
To rationalize its provisions for greater certainty and to safeguard the interest of tax payers, the applicability of the General Anti-Avoidance Rules (GAAR) has been deferred to April 01, 2017 and all investments made till March 31, 2017 have been put out of the ambit of the GAAR provisions.
Clarifications have been provided on the meaning of ‘indirect transfers’ and such provisions would be applicable only if the value of assets situated in India exceeds US $ 1.6 billion and comprises at least 50 % of the value of total assets of the foreign company. The taxation of gains arising on transfer of a share or interest deriving directly or indirectly from assets located in India will be on proportional basis.
The Tax Administration Reforms Commission (TARC) was constituted in 2013-14 under the Chairmanship of DrParthasarthyShome, and it has submitted recently a number of recommendations to the Government charting out a road-map for much-needed structural changes in the tax administration set-up .The recommendations are being currently examined for implementation.
But let me highlight an action that have not received sufficient attention. This year two High Court ruling went in favor of Vodafone and Shell which the government did not contest reflecting our commitment to not being adversarial.
Clarify confusion on both Cairns Group case and on recent MAT on capital gains of FPI.
Also clarify what we mean by “no retrospective taxation.” Emphasize the recent distinction you made between not undertaking tax terrorism and not being a tax haven.
In order to realize double-digit growth we need to undertake a number of reforms to increase investment and reduce burdensome regulations. Key among them are taxes. I believe that with the reforms we are undertaking and have announced that I have described today, we are well on our way to having one of the more modern tax systems in the world.