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Service tax hike not to have inflationary impact

Sarbajeet K. Sen K.R. Srivats

PUTTING IT STRAIGHT: Finance Minister, Mr P. Chidambaram

New Delhi Feb 28 The Finance Minister, Mr P. Chidambaram, plans to include a clause in the proposed insurance bill to hike FDI cap from 26 to 49 per cent. He is also confident of introducing the pension reforms bill during the current session of Parliament.

In an interview with Business Line after presentation of the Budget, Mr Chidambaram said the Government was yet to take a view on the proposed phasing out of participatory notes as recommended by the Ashok Lahiri Committee. He also declined to comment on the suggestion in the Economic Survey to alter the pricing mechanism for IPOs in favour of an `open auction' system.

On the increase in service tax rate, he maintained that it would not have an inflationary impact.


You have included Long Term Capital gains for calculation of Minimum Alternate Tax. What is the rationale?

Long term capital gains in securities does not arise out of the core business of the company. It is really due to treasury management. So why should it be excluded from the MAT base. What is the logic? I believe it was there in the original MAT section. It was removed when 115JB was enacted. We are restoring it.

From the Budget speech can we conclude that Central Sales Tax (CST) will remain at 4 per cent after April 1?

Not necessarily. Not if we reach an agreement earlier. The CST Act has already been amended. It only requires a notification to bring it down from 4 to 2 per cent. We have to reach an agreement on the compensation formula. It depends on when we reach the agreement.

The Budget does not reflect the report of the Exempt Exempt Taxable (EET) committee. Why is this so?

Why should it be. Every year we do not need to repeat the same thing unless there is a change of policy. We announced a policy last year and there has been no change in policy since. When we take a decision, we will announce it.

There were also hopes that measure for the oil sector would be announced on the basis of the Rangarajan committee report.

The report came seven days ago. You cannot take a decision in seven days on such complicated matter.

You have expanded the net by bringing in more services and have raised the service tax rates. Could this have an inflationary impact?

No. The service tax is adjustable against the service tax payable and against excise duty payable. In 2004, I raised it from 8 to 10 per cent. Was it inflationary? It was not. So why should 10 to 12 per cent be inflationary?

Last year you had said that you are looking at the tax department to improve its administrative set up so that EET can be introduced. Do you think that the department is in a position to introduce EET now?

Tax department is indeed in a position to implement it. The point is that we have to take a view on the EET report.

Sir, the Ashok Lahiri committee had suggested phasing out of Participatory notes (PNs). There were expectations that you would make some announcement on this.

Not necessary that there had to be something. There is a report. There is a dissent note. The report is with us as and when we take decisions, we shall announce it. Whatever decisions we have taken we have announced such as increased FII investment limits.

Are there differences with the Reserve Bank of India on this still?

Please! It is a Committee. One member of the Committee expressed a dissent. The Committee has given its recommendations. It is not RBI versus Committee versus the Government. It is for the Government to take a decision now.

The Economic Survey yesterday had suggested that IPOs should be priced through an open auction system. What are your views?

That is there suggestion. That is their view.

But what is your view on this?

I do not have to take a view immediately the day after the Economic Survey is published.

But you surely have a view on this?

I sure have a view. But I do not have to express that view 24 hours after the Survey is published. We will take a decision on this.

You have indicated that a Bill to amend insurance laws would be introduced in Parliament soon. Will that include a road map to hike Foreign Direct Investment cap in the sector?

One of the clauses will carry out our promise to hike the FDI limit from 26 to 49 per cent. There are many other provisions that are going to be amended.

Would the Bill also indicate revised capital requirements for example for companies in health insurance?

The Bill has not yet been drafted so we cannot tell you what it will have. We have got the K.P. Narasimhan committee report. IRDA will give its views. We will consider that and take a view. When we have taken a view, we will introduce the Bill.

What about the Pension Bill. Are you hopeful of introducing the PFRDA Bill during the Budget session?

Yes, we will introduce the Bill. We are holding consultations. There are certain differences that have to be narrowed down. If those differences are narrowed down, then the Bill will be introduced. The Bill is there in Parliament. The Standing Committee has recommended it.

In the last Budget you had introduced a clause requiring banks to report all deposits where interest was tax-exempt. Banks were finding it difficult to comply with the provision.

They are having problems. The software is being worked out. They are having some problems there (software). More time has been given to them to report now. There is some problem in collating the information. They will sort it out.

Will this system remain?

Answer. Yes it will remain. When new reporting requirements are introduced it will take some time for things to settle down. Let them report it. What is the hurry? It will be reported sooner or later.

With the introduction of CVD on all imports, do you think that the domestic industry has got adequate protection?

A reasonable level of protection. The average level of state tax is not 4 per cent but much more than that. At 4 per cent on all imports there is a certain level of protection.

What happens to VAT on imports. Has the Government taken a call on this?

You cannot impose VAT on imports without a constitutional amendment. VAT is a state tax. Imports can only be taxed by the Centre. The CVD that has been introduced is a substitute for VAT on imports.

In last year's Budget there was a perception that there was an aggressive estimation of taxes. But this time you have been somewhat conservative, for example on excise collections. Why?

These are your perceptions not ours.

If you look at excise, your RE this year is lower than the BE.

Correct. Rs 9,000-crore less.

Why? What is the problem on the excise front?

The problems are export drawbacks, area based exemptions such as in Uttaranchal and Himachal. There is diversion of industry. That is the problem. You go by a base, but there are departures from the base. The moment exports go up, the drawbacks take place.

On FRBM targets? Now that the economy is doing so well do you see a situation where you can revise the targets?

No. We are going to stick to the targets that we have got and we will be happy if we can achieve those targets.

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