Financial Daily from THE HINDU group of publications
Wednesday, Mar 02, 2005
Industry & Economy - Interview
`People should be pushed into a cheque economy'
The Finance Minister, Mr P. Chidambaram. - Kamal Narang
Sarbajeet K. Sen
New Delhi , March 1
QUITE in contrast to last July, the Finance Minister, Mr P. Chidambaram, was quite relaxed on Tuesday afternoon when he met the Business Line team.
The reason was not difficult to guess. Last year was a hurried affair and the UPA coalition had just got off the ground. Eight months down the line, Mr Chidambaram was his usual confident self, assured that his Budget on Monday had gone down fairly well with the general public.
Industry, too, had got quite a few things, but the squeeze through the Fringe Benefit Tax was something that might raise a few murmurs but no serious opposition. After all, there would be a limit to protest against a tax avoidance measure being brought on board the tax regime.
There is considerable confusion among the corporates and even some criticism on the introduction of the Fringe Benefit Tax, especially the inclusion of sales promotion and publicity into this net.
That is the only entry that they have pointed out to me and I have said that we will find out why it is there.
Do you have rough estimates on how much you would raise though this tax?
All estimates are rough estimates. So why make rough estimates public?
Is it a sizable kitty?
We don't know. Let's see. I don't disclose estimates.
The general public and even MPs have also not taken kindly to the 0.1 per cent tax of cash withdrawals above Rs 10,000. Wouldn't a bank transaction leave a trail in any case even without the tax?
You do not have the information about cash withdrawals that I have.
Can you share that information with us?
I will, at an appropriate time. The point is should large cash withdrawals with no ostensible purpose be discouraged or not?
If the answer is yes, then people should be slowly pushed into a cheque economy. I have taken one step. You can quarrel with this step and suggest another. But the point that must be driven home is there are large cash withdrawals for no ostensible purpose and leaving no trail at all. That point has to be addressed.
What about companies? They also withdraw a lot of cash.
You are assuming things... all wrong assumptions. Company employees all have bank accounts.
But large companies do need petty cash...
If they withdraw, which I don't agree, then they will pay one rupee for every thousand.
You have brought the Zero Coupon Bonds back into the tax net...
As capital gains.
Yes. But what is the rationale behind the move?
That is the way international best practice is. The gain is taxed as capital gains and the notional interest is not taxed as income.
Do you think this would hamper the issuance of infrastructure bonds now that it is coming under the tax net?
On the contrary, I think they should be happy that it is being taxed at capital gains.
Why is the taxation on zero coupon bonds confined to issuance from the public sector infrastructure companies? Why not on the private sector?
Let's start where we think we can start.
A few questions on the financial sector starting with RBI's new ownership norms. Do you think they are too restrictive?
No. No. We have had long discussion with the RBI and we have agreed on what has been put out by the RBI. Every element of the roadmap has been discussed and agreed upon.
Would the RBI have any discretion in deciding on who should be given higher voting right among those who hold more that 10 per cent stake in a bank once the amendment to remove the existing cap is introduced?
RBI's roadmap, if I recall right, says that voting rights would reflect economic ownership. RBI would decide economic ownership. Whatever voting right will be available would reflect that economic ownership.
You have not given any fresh signal on consolidation among public sector banks in the Budget.
I have not received any proposals. All I know is that the roadmap talks about consolidation. In the Budget I have said consolidation, convergence and competition are the key drivers for the banking sector in the future.
Can we expect some announcements on mergers soon?
Let them (the banks) come up with proposals. I have made it very clear I am not going to force Bank A to consolidate with Bank B. Two banks must come up with proposals themselves.
Do you have any proposal for altering foreign investment limits in PSU banks?
No. For PSU banks, whatever is the regime today would continue.
The roadmap talks about FDI in private banks to implement the decision taken on March 2, 2004 (of allowing 74 per cent FDI in banks).
As far a PSU banks are concerned we are not making any proposals for any change in policy.
From your last year's FDI announcements, telecom and aviation caps have been hiked but we are not hearing anything about the insurance FDI hike for a long time. Is it now off the agenda?
No, it has not been put off. We will have to introduce a Bill. There are some other amendments required to both the Insurance Act, 1938 and the IRDA Act, 1999. All amendments would come together. We are not going to introduce a Bill only for one amendment. It is not off the agenda. From day one I have said the other two (telecom and aviation) don't require a legislative change but this requires a legislative change.
In your Budget speech you have mentioned that you will come up with an Income-Tax bill. Is the intention to rewrite the entire I-T Bill?
The intention is to bring a brand new Income-Tax Act.
Apart from the Goods and Services Tax that you mentioned in your speech, there is no signal on what is the rate at which the Service Tax and the Cenvat will converge.
You are right. There is no signal yet. There is thinking but not the time to signal.
Can the thinking be shared?
How sure are you about the VAT implementation?
Reasonably sure. Why should State finance ministers lose their nerve? After all, seven years they have worked through successive governments. They have come to a consensus, they have put out a white paper and they have declared the date and agreed upon the rates.
The States are not losing their nerve. They are, in fact, sitting pretty because they get 100 per cent compensation in the first year. So they are not worried about revenue loss. The worry is about their preparedness...
That is a short-sighted view, and if I may say with great respect, a completely unfair, uncharitable description of State Finance Ministers.
The argument that they would do nothing is a completely untenable argument. If they do nothing in the first year they would lose 25 per cent in the second year, and the third year 50 per cent. So, in their own self-interest they would collect taxes.
Is there a possibility that States can backtrack after a year?
I don't think so. If they pass a VAT law and repeal their State laws and the VAT law comes into force why should they backtrack and why should we assume that they would backtrack.
On VAT on imported products you have said that you are only empowering yourself. How do you see...
This is the demand of State Governments that we must take the power to levy a VAT on imports in order to create a level-playing field. So we have taken the power.
On infrastructure development, what would be the structure of the SPV that you have mentioned?
It would be a shell company. It would have to have some small capital. It would raise resources and lend it.
The Budget has received flak from some rating agencies on poor fiscal consolidation.
I have also said that. I have said in my speech that we would have the press the pause button on the Fiscal Responsibility and Budget Management (FRMB) Act in the coming fiscal because of the strain imposed by the 12th Finance Commission. 2005-06 is the transition year and the impact will be there. Nevertheless, fiscal deficit is coming down according to the Budget from 4.5 per cent to 4.3 per cent. The correction that is required is 4.5 to 4.2. We are not able to achieve 4.2 so in the Budget the estimate is 4.3. It is not adequate but there is some fiscal correction. On the revenue deficit side we are not able to bring it down from 2.7 per cent. But that is an impact which will be felt in the first year.
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