JAIRAM RAMESH: OK. Let us stay on this issue of expanding the tax net. Suman, expanding the tax net, getting more people to pay taxes, getting the existing people to pay the right amount of taxes - what can we reasonably expect from this Budget?

SUMAN BERY: I feel more comfortable talking about tax environment rather than specifically the taxes. Can I just make a couple of comments on the points that have already been made and then address your question?

Indira mentioned Argentina, Latin America. I think one thing one has learnt from the Latin experience or from the experience of transition economy is that people pay taxes when they feel they are getting public services. So, I think it goes back directly to the issue of governance. I think what has happened is that people are increasingly disconnected from the Government as a supplier of services and that is why we have a tax strike. Yes, you can do a lot of things in terms of revenue raising etc.; but to come back to the agenda that you articulated, Jairam I think there is an issue there. It may be a more patent issue at the State level than at the Central level because that is where the failure of service delivery is more patent. That, I think, it has an impact.

So, at the moment, we are slowly moving into the kind of space that the Latin economies have been habited for a long time, which is that the State is distress State, it is rapacious and, therefore, all actions are taken to stay outside its reach. Therefore, I see the issue as a broader one and I think, it may still, as it were, the path of erosion rather than the path of reconstruction. Secondly, I do have to fully agree with Indira on this business about financial transactions tax. I think a point that several people have been making is that effectively we have been moving towards cleaning up our capital market, certainly let us so in the case of the banking system and part of the purpose of doing that is to reducing the intermediation margins. What one has already seen in a capital market like the Brazilian capital market is that the financial transactions tax which was resorted to in order to create a huge shift in the primary position at the time of the 1999 crisis has basically resulted in even more equity market business flee to New York and that is the point that when you have a financial transactions tax, that all the large transactions will then try and dis-intermediate away from it.

I think the third point, therefore, really to ask is - do we want to adopt essentially a Reagan-Bush strategy or do we want to adopt a Democrat strategy with respect to the overall fiscal picture. What I mean by that is do we feel that the right actions are more likely to be taken if there is fiscal stress or that right actions are more likely to be taken if there is fiscal leaves. I think there are debates about whether, for example, if we had capital account convertibility at this time, whether that would be proved to be more of a disciplining factor than having capital account restrictions.

JAIRAM RAMESH: By capital account convertibility you mean that ordinary readers of INDIA TODAY who have access to resources can convert it into dollars and invest it in stock markets abroad or buy properties abroad - is that what you are saying?

SUMAN BERY: Yes.

JAIRAM RAMESH: So, basically, the key is domestic residents is to convert their rupees into dollars.

SUMAN BERY: That is right. And so, basically, it is a strategy that has its risks; but they have been treaded fairly, if you like, responsible people including I think I can say, Montek Singh Ahluwalia, who have argued that as it was the sense of pressure that Indira s talking about on the political system to act would be greater if residents could more decisively vote with their pockets. What is happening right now is that there is a category of residents who have that realm of action; but then they are first suckers who are trapped in the system and have to face the consequences.

So, at the end of the day, I suppose, I am on the middle of the road on this. I am not a Reagan-er. I think you are all running risks if you put all of the pressure on the fiscal deficits. But I would back another point that I have made is that the real charm of the Central Government is to come up with a direct tax system that works and the way you do that is to reduce rates, the way you do that is to increase threshold levels, create the sense of fairness, to alienate exemptions and that is the kind of steady path you need to be on, I think rather than kind of messing things up.

JAIRAM RAMESH: Bibek, let us take Suman on this point. The job of the Finance Minister really is to give to the country a direct tax system that is credible, that works and that delivers as far as both the taxpayer is concerned and as far as the revenue is concerned. Are we headed in that direction or do you feel that given the existing tax rates, it is the tax administration is really at fault?

BIBEK DEBROY: Before reacting to that, Jairam, I would like to quickly react to one or two points that have already been made. If I am not wrong, Subhasish's suggestion was experimented within South Korea. I am not very sure whether it was successful or not. But anyway, let us come back to the basics.

I think the basic problem is that there is a serious credibility issue and we need to recognize it. It is not simply a GDP growth rate issue. If one is talking about GDP growth rates, it depends on what the benchmark is, what is the definition of the new 'Hindu rate of growth'. But it is clear that it is not going to be 4%. The worst in that sense of the downturn is over and indeed, Arvind is right that part of it was contributed by the global phenomenon. But all of it is not explained by what was happening globally. China has been doing 7% despite the fact that China's export intensity is double of ours.

So, going back to the Budget, and this is the issue of whether many of these desired reforms should happen within the Budget or outside the Budget - the problem is that if you mention them in the Budget then you are taken seriously to task when you fail to implement. I personally think that the Budget should just stick to the Central Government's revenue and expenditure which is what it is supposed to be and not make promises which it cannot deliver.

JAIRAM RAMESH: Incidentally it was till the mid-1970s.

BIBEK DEBROY: You see the problem really is - I will come back to your question a bit later. But the problem with the Budget is you will have party of the Budget speech which almost certainly will announce a whole plethora of Centrally sponsored schemes again and things like agriculture etc. which are measured in terms of expenditure rather than in terms of tangible outcomes. It is on record - a statement which says that all Centrally-sponsored schemes will be subjected to zero-based budgeting. No one knows whether they are actually implemented or not. So, in terms of the overall message of the Budget, I think the Finance Minister should be innovative and say no party of the budget speech at all except revised estimates for this year.

So, effectively the budget becomes an issue of revenue and expenditure.

JAIRAM RAMESH: Let us move to part - B.

BIBEK DEBROY: Let us move to part B - revenue and expenditure. For credibility, and this is a stipulation of what Suman is saying, for credibility one has to do something on expenditure and what needs to be done on expenditure is patently clear and obvious. The recommendations of the Expenditure Reforms Commission are already there and on those recommendations I do not mean food subsidies and fertilizer subsidies which is what the Government talks about; but the ordinary citizen identifies recommendations of the ERC not at food subsidies and fertilizer subsidies but of the downsizing of the Government.

JAIRAM RAMESH: Give me your example. Give the reader an example.

BIBEK DEBROY: Well, the ERC identified various Ministries and Government Departments where jobs were supposed to be slashed by July, 2001. That was a specific deadline which has not been adhered to.

JAIRAM RAMESH: Is there an example of a Department that has citizen interface that was recommended for closure by the ERC?

BIBEK DEBROY: Well, I do not remember the ERC's suggestions. But I would identify, if you ask me to identify Ministries. I would identify the Ministry of Information & Broadcasting. I see no purpose in having such a Ministry; I see no purpose in having a Ministry of Steel. I think the Ministry of Steel was identified for July, 2001 and not I&B. So, there has to be something on the expenditure side. In the expenditure side, interest payments, of course, are related to disinvestments of equity; on defence expenditure no one dare touch because one will be accused of being an anti-nationalist; wages and salaries and pensions of Government employees - one cannot touch. Hence I am focusing on this downsizing part of it.

Going back to tax reform, that has two components. There is the direct part and there is the indirect part. The indirect part, unfortunately as Indira says, has got linked with VAT and on the issue of service taxation I quite agree with Indira that service taxation is inefficient. I do not know why she said it. I am saying it primarily because it is anti-theatrical to have VAT principles because what you have got is ….

JAIRAM RAMESH: Bibek, we are talking to - what is VAT?

BIBEK DEBROY: VAT means essentially you tax the value added part. So, you have a credit for inputs that are consumed. Unfortunately in services what you are taxing is the turnover. So, it offers no credit for the earlier part of it.

JAIRAM RAMESH: Does the consumer end up paying up more?

BIBEK DEBROY: The idea behind it is the service taxation rates today are 5%. The Budget might jack it up to 10%. It is on turnover. A VAT-neutral rate would vary from item to item. If you wanted an average figure, I guess it would be about 12.5 or 15%.

INDIRA RAJARAMAN: It is something high - for some States it has been worked out at 10%.

JAIRAM RAMESH: When prices of services that are provided to me as an ordinary citizen ….

JAIRAM RAMESH: If I had a value added tax system, will I pay more or less?

BIBEK DEBROY: My suspicion would be you would have a one-shot increase in prices.

JAIRAM RAMESH: So, I will pay more in hotels; I will pay more for my bus service; I will pay more for my telephone.

BIBEK: But, after a while, when the inefficiencies begin to disappear that would probably be …..

JAIRAM RAMESH: It is a big assumption. But in the short run, what you are saying is value added tax means taxpayers end up paying more tax.

BIBEK DEBROY: But remember, VAT has been postponed. So, we ought not to be discussing it in the context of this year's Budget. It has been postponed to next year.

SUMAN BERY: VAT involves sales tax and expenditure tax etc.

BIBEK DEBROY: So, having said this about the indirect taxes, ….

JAIRAM RAMESH: Do not underestimate our ability to impose VAT on top of everything else. Remember in 1957 the expenditure tax was supposed to be imposed by TTK and he was supposed to reduce the rate of income-tax. You did not reduce the rate of income-tax; you imposed the expenditure tax and the effective rate of taxation zoomed to almost 100%.

BIBEK DEBROY: Jairam, I want to say two more things quickly about the tax part. So, effectively, in the Budget, you are looking at import duties. Perhaps, we can talk about that. I am certain that there is going to be a reduction in import duties - peak of industrial products.

JAIRAM RAMESH: So, CII and FICCI would be very unhappy.

BIBEK DEBROY: Well, too bad. Then, they will be given sops in terms of reductions in the peak rate for corporate taxes, restoration of the investment allowances etc.

JAIRAM RAMESH: You mean the suggestions - you are saying that the rate of corporate tax is going to come down in this Budget. Is it so?

BIBEK: I have a feeling it may come down to 30%

JAIRAM RAMESH: So, companies would pay less tax; but import duties will also come down.

BIBEK DEBROY: On direct taxes, the issue of agriculture is already being mentioned. But one point I would quickly like to flag is the removal of exemptions - removal of exemptions not only on direct taxes but also on excise. That, I think, is extremely important and I have a suspicion that some of it is likely to happen in the Budget.

JAIRAM RAMESH: Subhashis has been characteristically silent so far. Please mention on personal income-tax.

SUBHASHIS GANGOPADHYA: On personal income-tax, I know Sujit has contrary views. But on personal income-tax rates I think the rates are going to be where they are. There is not much scope for changing them. There will be changes in the threshold, perhaps. There are issues connected with widening the base. By the way, the idea of transactions - one very simple idea would be to insist on PAN numbers for all kinds of transactions that one has and there is absolutely nothing wrong with that. The problem is that the income-tax department is not in a position to give people PAN numbers or cards even after ten years. So, there are serious systemic problems which are enforcing the tax regime.

JAIRAM RAMESH: Surjit, let us get you in here. Let us start with the income-tax. This relates to the concerns of ordinary citizens rather than others.

SURJIT BHALLA: It is the topic of the mind. So, I will speak on it.

Let me first speak in general and lead up the logic of it. I wanted to start off with the five pluses and the five negatives. You are being very informative. What is informative of the outcome is several of the pluses are actually negatives and to get a perspective on the Indian economy that you have foreign exchange reserves of the kind that you have, suggest that it is actually negative; to have foodgrain stocks of the kind that you have is actually a negative. Privatisation is clearly good. Even current account deficit backlog is a negative and it is not a positive.

Now, coming to your negatives, because I think they have an import to the rest of it, your first one is - if we believe that with recession figures; and then you say there has been an investment famine. We have been doing fantastic if there is an investment famine and our productivity is going to go up. We have got to be very careful about how we use these numbers. We should not get into the habit of trying to emulate the CSO because they come up with these numbers of 4% of GDP growth and we take them for granted when it is actually bordering on, if not 8%, 5.6%. Four per cent is actually 5.6% and you can look into the banking and the insurance sector which I will be happy to talk about.

Then, we come to the wide gap between promise and performance and, perhaps, we can have that in the second round and governance is, I think, where you have got a politically correct term called governance; I call it just widespread corruption. I think that is the core issue facing not the economy, not necessarily the Budget.

Now, let me come to two or three things and if I disagree with my esteemed friends …

JAIRAM RAMESH: That would be about but natural;

SURJIT BHALLA: There are a couple of things. One is starting of with the most recent suggestion of Bibek's. I think both the economists obviously will disagree; I personally would want to go and say that expenditure is not a problem at all. Indeed if you look at the data, basically expenditure growth has barely matched GDP growth and secondly, especially now, the one major problem, mega problem which you were presiding over which, I think, was the expenditure problem of the decade, if not the century, was the Pay Commission's awards which have fully happened in your tenure. I think, once that is out of the system, there is very little that there is to be done on the expenditure side. I have nothing to say as far as defence expenditure is concerned. Somebody mentioned, I think Bibek mentioned, about not being patriotic. I would go a step further. I have mentioned this at the Finance Minister's meeting with the columnists that the talk about a war tax would at least indicate to me that the one solution India had of solving the deficit problems is going to war. I think if they were to increase taxes, I think that is how more sensible people should look at it.

JAIRAM RAMESH: So, expenditure is not the real problem.

SURJIT BHALLA: It is not the real problem. I will now directly come to the Budget and coming to the revenue generation. I think there is also a lot of positives and I think it is very important to look at the positives to see where more can come from on the revenue side, which, I think, is a general one. Somebody mentioned it.

JAIRAM RAMESH: I think everybody has agreed that basically revenue raised is the crux of the issue as far as this Budget, or as far as any Budget is concerned. But particularly so at this juncture of time.

SURJIT BHALLA: At this juncture that is the key.

JAIRAM RAMESH: By the way that is a paradigm shift in our thinking because so far our focus has been expenditure, expenditure and nothing else.

SURJIT BHALLA: There is a shift in consensus and there is a shift in thinking.

They have been saying this for quite some time. As I said, the Pay Commission was the expenditure thing.

A DELEGATE: I have to say something. There is a paradigm shift in this, in Surjit's thinking.

JAIRAM RAMESH: Let us stick to the subject. Let us come to taxes.

A DELEGATE: Surjit leads India follows.

JAIRAM RAMESH: For a magazine it is a very good sound byte - expenditure to revenue.

SURJIT: Basically the tax regime that India should move towards, and I am not saying they are going to do it now, but I would bet that this going to happen in two to three years. It is basically, I think, one of the encouraging things about India, at this juncture, is that we have come a very long way and things are becoming inevitable. For example, let me just backtrack to why I think there will be lot of reforms on the subsidy side is because we wished that in; we cannot go any further. Apart from the consensus among this table nobody is willing to give the State more power reforms that you have written about and several have written about. It is coming from within the States. They have nowhere else to go. So, it is a name game.

Now, let me come to the taxation side. First the policy is very briefly that it should be 5, 10 and 15 that is to say three times rates of 5%, 10% and 15%. It is direct tax. I will come to indirect taxes later.

JAIRAM RAMESH: Do you mean reduce the rate of direct taxes?

SURJIT: Absolutely. Let me make it more clear.

JAIRAM RAMESH: So, you want to out-Chidambaram Chidambaram.

SURJIT: Yes, I will come to that which, I think, was one way.

INDIRA RAJARAMAN: It is breaking down of the spine.

SURJIT: What I would wish for is that we look at numbers.

JAIRAM RAMESH: Surjit, your first suggestion is 5, 10 and 15. Let us move on.

SURJIT: It can be 5, 10 and 15. The carrot is 5, 10 and 15 and the stick is as follows - no deductions besides the standard deduction. That is to say 50,000 everybody gets off; the first Rs. 50,000.

JAIRAM RAMESH: No other deduction whatsoever.

SURJIT: No other deduction whatsoever. Now, how much of these deductions are worth? Let me say that I have done a large study on this. Those deductions today are worth about Rs. 18,000 crore - non-standard deductions at prevailing tax rates, it is worth about Rs. 18,000 crore. These are all legal deductions which we all tell ourselves to make and if we do not avail of them we are being stupid.

JAIRAM RAMESH: So, it should be 5, 10, 15; standard deductions

SURJIT: Exactly. I will tell you how that numbers work out.

JAIRAM RAMESH: No, we take your point. It is 5, 10, 15 and the standard deduction is Rs. 50,000. OK, then move on.

SURJIT: Yes. And that will give you Rs. 18,000 crore. We are talking lots of moola here with the same compliance rate.

JAIRAM RAMESH: I think the readers of INDIA TODAY would love you.

SURJIT: It should be with the prevailing compliance rate. I am coming to the prevailing compliance rate. One of the success stories in India, starting from the 1997 Budget is, there were 11.2 million returns in 1997-98 and today there are about 24 million returns. That has doubled. The number of taxpayers in India has doubled.

The tax collected from individuals has also doubled in the same time period. It was, in 1997, Rs. 17,000 crore and today, last year it was Rs. 35,000 crore. These are all budget figures. So, therefore, it is a fantastic story that you are having here.

Now, we come to who is paying and who is not paying. This is direct income-tax collection - no corporate tax here. It is all individuals. Now, let us look at compliance rates. Indira has mentioned and I want to show that those numbers are quite wrong - not that it is 20,000; but, I think, first we should note, if you are looking at direct income taxes, with our perceptions about the ten lakh and above assessees is whether it is families or whether it is individuals. In India, unlike the U.S., we have individual filing returns. If you are households, I think there are a lot more households; for example, the compliance rate which is now - the number of people filing tax returns to the number of people with that inkling in society and excluding agricultural income - so all of those things are there. It is snapping tax. The compliance rate for those earning Rs. 10 lakh and above has varied from 1996 a figure of about 33% and today it is 33% and in 1999 it was 41%. It has declined.

INDIRA RAJARAMAN: Where do you get this from?

SURJIT BHALLA: This is a study.

JAIRAM RAMESH: Surjit, let us not delve on these numbers. Where is the punchline.

SURJIT: The punchline is that about 1.8 lakh of people today, individuals with earnings above Rs. 10 lakh a year. And there are about …

JAIRAM RAMESH: There are 1.8 lakh individual Indians earning more than Rs. 10 lakh a year. Is that what you are saying?

SURJIT: Yes. This is from the income distribution. From the tax data the compliance rate is there. That number that was 20,000 is now about 50,000 or 60,000.

INDIRA RAJARAMAN: Where did you get that?

SURJIT: This is from the C&AG. The Comptroller & Auditor General of India published the number of returnees since ,,,,

JAIRAM RAMESH: So, 60,000 people in India actually pay tax. Those who are …. That is a reasonable figure. The Finance Ministry figure is currently it is 40,000.

SURJIT: This is also Government figure. It is from C&AG; on the website. I think it is there. It is by income.

PRABHU CHAWLA: Surjit, you are saying that in India we have got 1.8 lakh people who have income of more than Rs. 10 lakh.

SURJIT: That is correct of individual earners, but it is non-agricultural.

JAIRAM RAMESH: It is a completely bizarre number.

SURJIT BHALLA: It is not a bizarre number. This number has been arrived at …

JAIRAM RAMESH: No, I am not doubting it. In general …..

SURJIT BHALLA: Let me finish. I will come now to wide tax base……

JAIRAM RAMESH: ….you look at the number of editors in INDIA TODAY.

A DELEGATE: You see INDIA TODAY's circulation.

SURJIT BHALLA: Now, the thing is this figure is arrived at. It is 1.8 lakh people. Let me finish and in two minutes the point will come. There is, if you now want to look at households' earning about Rs. 10 lakh a year; that number is somewhere above five lakh in India. It is somewhere around that; it is very hard to estimate that because we do not have the data. But basically the estimate of that is five lakh to seven lakh. Now, the reason this data cannot be wrong is because it exhausts the entire income that we have. If we think this number is wrong, then somebody else has to give. These are all GDP figures, per capita GDP figures. So, somewhere else you have to really downgrade their incomes and then we can talk about that in two minutes.

Now, the most fascinating thing about this is - I think this goes to what people might be getting at; now let us look at for compliance rates which is, as I defined, between two lakhs and five lakhs and that compliance rate is something like 2 to 3 per cent. What is happening? Here is the distribution. These are all published figures. All are from income-tax statistics. The denominator is mine; the numerator is from there. These guys are not paying the taxes. Then, nobody is paying. Who are they? They are not the editors of INDIA TODAY because they get wages; but they are the panwalahs, you have your lawyers, you have your accountants - they are those people who have mixed income.

A DELEGATE: This is the support base of the Government.

SURJIT BHALLA: But the point is - it has happened whether the Congress was there or anybody else was there. …

JAIRAM RAMESH: Basically those numbers are not paying the taxes. These are basically self-employed who are not paying taxes. The self-employed professionals are not paying taxes.

SURJIT BHALLA: Yes.

JAIRAM RAMESH: Surjit, let us take this up. I am yet to bring Arvind into this. What in your view should Mr. Yashwant Sinha be doing in this budget to target the self-employed urban professional to pay more tax?

SURJIT BHALLA: This is where, whether it is Subhasish trying to say and I am also on the face of it do not like - but I think we need to think along how best we can do. We have already proceeded quite bit because the compliance rates for the other guys have stayed the same and these guys are the same. So, you have telephones, your bank accounts - I do not know. But, I think, that is where effort should go - there is a large scope for it and the amount of revenue gained is basically, if these guys were to comply and have the same compliance rate average, which is about 21%; then you get about Rs. 15,000 crore right there.

JAIRAM RAMESH: Arvind, is the self-employed urban professional the villain of the piece as Surjit is making him to be?

ARVIND VIRMANI: I think he is right. Let me give you one simple example. I live in a very middle middle class neighbourhood. Over the last 10-15 years I have seen every house has been broken down and re-built. These are real small houses - very very small like 100 or 80 sq. ft. etc.

ARVIND VIRMANI: It is not just professional; it is all self-employed.

JAIRAM RAMESH: Anybody in business basically.

ARVIND VIRMANI: Yes. It is urban business or any kind of business. They are not filing their returns; they are not paying their taxes. Secondly, just a point from history, I did this kind of estimate about 15 or 20 years ago using NCAER data and I came to very similar conclusions. I must leave it at that.

What I really want to address is the excise service tax where I am free to talk because I have not really in the recent past done it; but I was on the service tax Committee etc. I disagree with the approach which seems to be implicit here and go more with what you are saying. I think really the business of the Central Government, most importantly is the Central taxes and what I have been plugging for a long time is the CENVAT and the integration of that with the service tax.

JAIRAM RAMESH: Can you explain what it is in a very simple language, what CENVAT would mean for the consumer?

ARVIND VIRMANI: I am sure the consumers have heard of MODVAT etc. The point here is really whether we should focus on the national tax. That thing is going on; it has been going on for some time; but neglect the central part of the taxes. There are certain taxes which are assigned to the Centre; including certain service taxes, including certain goods taxes, which used to be called excise. I think the most important thing is to integrate what is within the domain of the Central Government and have a simplified structure. One of the reasons - I am sorry that I disagree with Ms. INDIRA RAJARAMAN that we were not aware of this because I have been involved in tax reforms for the last 15 years. There were two sources which were supposed to fill the tariff reduction. One was the income-tax. As Surjit has said that has certainly played its due role and it will continue to play.

What has not happened is the excise tax. Its revenues have gone down drastically and my personal view is that it is because we have not simplified it drastically now.

JAIRAM RAMESH: Is there a relation there also?

ARVIND VIRMANI: Exemptions have gone up. Let me complete. I will take a few sentences more. What is called the CENVAT was really supposed to be a dramatic simplification. It did make a significant difference; but there are still lot of professionals, colleagues of Indira who insist on making it more complicated. For example, on the basis of a recommendation of a very eminent tax expert - there was an exemption on capital goods, 100%; we have deliberately chosen to introduce it. He divided it up in two years again complicating the structure. You have got to keep track it for two years.

What I am saying is there is still room for simplification of this excise part of the CENVAT. The second is - the focus should be on the Central service tax because we do not know when the national VAT will come as you know the history every year - do not quote me on that. The thing is, to make the service tax as the central part - there are certain things in the Constitution which are part of the Central Government and there are certain which are in the States. The thing is to make as much of it as possible which have national implications.

JAIRAM RAMESH: You give us an example.

ARVIND VIRMANI: For example, transport. That is transport across the country. You cannot give it to the States. You will mess up the whole structure. There are many things like that which have to be in the Central VAT. So, the thing is to integrate it and simplify it.

JAIRAM RAMESH: But do you see in this Budget, Arvind - I am not asking for Budget secrets obviously - but what I am saying is from the point of view of the taxpayer simplification and rationalization is one thing; but ultimately what comes out is - am I going to pay more tax or am I going to pay less tax; or more services is going to come within the ambit of taxation or less services is going to come. So, I want you to just give us a flavour. What are the types of services that are there?

ARVIND VIRMANI: There was a report on service tax reforms. It shows how much is done.

JAIRAM RAMESH: Just give us some accurate example.

ARVIND VIRMANI: Well, the transport is really a major one. That is an example which is there. The transport operators - Patel Roadways etc. are there. I think there would be some effect; but given the fact that inflation is so low, I do not think that is a real serious problem.

JAIRAM RAMESH: So, transport is there. Anything else? What about advertising?

ARVIND: Well, all kinds of professional services are there.

JAIRAM RAMESH: So your recommendation would cover it.

ARVIND VIRMANI: The recommendation of the service tax Committee was to impose it on all services except certain ones like education.

A DELEGATE: Let us want to be clear on this discussion. Normally we talk about tax reform, and particularly indirect tax reform - it has been oriented towards improving efficiency. Now, is it anybody's sense that the reason we are doing this is for revenue rather than efficiency?

JAIRAM RAMESH: I think Indira wanted to say something on this.

INDIRA RAJARAMAN: Arvind has said a great deal to provoke me and I must come in. I was not a party to that reform in any case. That is not what provokes me. The central problem with our fiscal situation and the reason why we are in a kind of mess today that we are in is because we have always done this kind of fire-fighting. If we look at service taxation by the Centre as an immediate way out of the revenue famine that we have today, that would be very very bad from the point of view of structural reform of the economy in the long run.

JAIRAM RAMESH: Your point is service tax is really the States' responsibility.

INDIRA RAJARAMAN: No. My point is that you need a clear division of tax domain - between what falls within the domain of the Centre and what falls within the domain of the States.

JAIRAM RAMESH: and that this does not exist today ..

INDIRA RAJARAMAN: Well, what happened was when the Constitution was drawn up, services with inter-State implications were assigned to the Centre and residual services, other services were assigned - main services actually - to the States and this residual category was left unnamed, unspecified which is the domain that the Centre is working into now to correct the hole in its revenues. If you are interested in structural reforms of the economy in the medium term and not just for what is going to happen next year, I think service taxation by the Centre is absolutely the wrong way to go. I think what we have to work towards is to get an insulated system of taxation of goods and services by the States on a VAT basis and for the Centre to look at its legitimate tax domain which is the income-tax.

JAIRAM RAMESH: Indira let me just ask you one question. Take the point of view of a layman. A layman is looking at taxes. Agriculture - not taxed; the share of agriculture in GDP is 40; the share of industry in GDP is roughly the same. You are not taxing the service. So, what you are doing is you are making - I am just telling you this - the industry point of view is that you are completely loading on to industry.

A DELEGATE: There is the dividend being taxed.

JAIRAM RAMESH: It does not make much difference. I am talking of gross sectors. The argument is agriculture - you are not taxing; services - you are not able to tax because of constitutional reasons. Therefore, what you are doing is you are loading on to Indian industry about the entire burden of taxation. Please address this issue.

INDIRA RAJARAMAN: I am coming to that. You are wrong on this. I want to address this issue.

PRABHU CHAWLA: I want some information on this. I would like to know what is the proportion of revenues collected by the States and the Centre - if tax amount is being collected as revenue what is the proportion?

JAIRAM RAMESH: It is 64 : 36.

INDIRA RAJARAMAN: It is actually 67 : 33; 67% by the Centre and 33% by the States. On the GDP it is 9% and 5%;

JAIRAM RAMESH: Incidentally I want to make a point before you go further - this 67/33 proportion in China is exactly the reverse.

INDIRA RAJARAMAN: Yes.

JAIRAM RAMESH: It is interesting that in democratic India it is 67/33 and in Communist China it is actually 33/67.

INDIRA RAJARAMAN: Yes. Let me come to my point.

PRABHU CHAWLA: Let us not go to China. Let me complete my point. I have to give editorial directions on what I want. We are cutting that issue straightaway. Some States are being ruled by your Party. Let us come back to that. Whether the Budget is becoming irrelevant because States are in coalition politics and the Opposition party is not willing to take the responsibility of working that out in the State level. That is the point.

JAIRAM RAMESH: We are talking now on the Central Budget.

A DELEGATE: To the extent, I think it goes back to what Suman was saying, if one is talking about income-taxes, direct income-taxes, which is the domain of the Centre; it is not the domain of the tax; that is separate.

JAIRAM RAMESH: There is the issue where there is paradigm shift.

A DELEGATE: It is revenue's concern. When revenue is the concern then it is not only of the Central Government but also of the State Governments also.

A DELEGATE: I am making the following limited point. Revenue is a major concern. Let us talk, for a moment that we are not going to take up other issues, at the Central level the revenue from direct income taxation, it is the domain of the Centre. So, we are right now on it. It has nothing to do with Centre-State and with anything else. It has got to do with - there are holes in your success story of income-tax. That is why I do not want to give the service tax etc. These are the people and you do not want to have distortions within the income-tax payers that I have become a service just like the corporate tax versus the personal taxation.

PRABHU CHAWLA]: We are again shifting. When you are talking of revenue as the major concern, is it the concern of only the Central Government or the States also?

INDIRA RAJARAMAN: May I respond to you? The response to you is the following. When you look at tax-GDP ratios, at Centre and State levels, over the last 12 years, revenues at State levels have remained roughly constant at around between 5 to 5.5 per cent of the GDP. It is at the Central level that the tax-GDP ratio has come down for very legitimate reasons because there was trade tax reform as part of the 1991 reforms and so revenue sourced from trade tariffs went down. The problem was that no attention was paid to where compensating revenues were to come from for the Central Government. So, the quick answer to your question is - Yes, States can do more; but actually as it happens they have been keeping in the same place.

JAIRAM RAMESH: The answer to Mr. Prabhu Chawla is really that the States are not doing enough to raise revenues on their own. There is no doubt in my mind.

INDIRA RAJARAMAN: This is the advanced tax that I am talking about which has remained constant as a percentage of GDP.

JAIRAM RAMESH: Yes, in terms of raising revenue on power, in terms of raising revenue on user charges in irrigation, in terms of claiming up the sales tax, in revenue collection, tax administration, sales tax etc. - I think the general point that Prabhu is making is absolutely valid that no State in India, including Tamil Nadu, which is among the fiscally more better administered States, the South Indian States, none of the States are in a position to say that they are doing their best in order to raise the revenue.

A DELEGATE: But we are discussing the Central Budget.

INDIRA RAJARAMAN: But the fact remains that in terms of the tax-GDP ratio the States' own tax revenue has remained constant. …. Actually I was saying something when the Editor intervened. About the income-tax you said agriculture versus manufacturing etc. and are we loading manufacture too much. You are wrong there. It is only agricultural income …

JAIRAM RAMESH: No, I am not wrong. CII and FICCI are wrong. I am just giving you the industry view point.

INDIRA RAJARAMAN: Please let me speak. I have been interrupted quite often. It is only agriculture as a source of income which has been specifically excluded from the income-tax. No one stopped the Centre from taxing through direct taxes income sourced from services. No one stopped the Centre. It was failure in tax administration which prevented it from effectively taxing income from services. So, when you are talking about the service tax, as a tax, as an indirect tax on the services, that is an admission of Central failure in actually attacking service income through the route which is its legitimate channel, through which to tax service.

JAIRAM RAMESH: So, you direct taxes from services.

BIBEK DEBROY: There are just one or two quick things. I want to bring up the Pay Commission again because Surjit mentioned this. There is a reason; there is a connection with this. The Pay Commission was supposed to be neutral from the real point of view because it is an increase in prices of services. I do not think the CSO can measure it in that form and probably much of the non-real effect went into the GDP growth. The reason I am mentioning this is on the streets what is imposed specially on the stakes is not just the populism and the subsidies but also the implementation of the Pay Commission records. In several States the hikes that have been given to employees are far more than what was even given at the Central level. One quick addenda to the services part is - Indira is absolutely right that most services are constitutionally with the Centre and you cannot pass them on to the States until you actually revamp the Constitution. There is an alternative route which is to use the central excise act as a model and in turn something like a service tax Act where you feel that it is a tax that is levied by the Centre but is colleted by the States and retained by the States.

But, in the last resort, if you are cleaning up the system which is indeed the intention rather than revenue, then what is Centre and what is States from the distribution point of view ought not to matter at all because you have got a consolidated pool from which you have got an agreed formula in net terms for distribution from the revenue collection part of it, it is an issue; but not from the distribution point of view, it ought not to be any more.

JAIRAM RAMESH: Subhasish, I think you were trying to say something on tax revenue.

SUBHASISH GANGOPADHYAY: Yes, I was trying to say the following thing - in the sense that everything that has been discussed, there is very little to disagree with. People may have been giving different emphasis to different places. But the thing is one thing, I think, we are missing given your question that what can the Government do in this Budget firstly and secondly what is the major problem in this Budget. What we have been discussing as a major problem in India which will probably take us five to seven years to solve it, it cannot be solved in this Budget. The income-tax business - yes, it has to be done. We have to get more people in and things like that. But everything that is being suggested is not just simply for this Budget. I do not think that we are going to have a tremendous increase in revenue this year because of what the Finance Minister says in his Budget and then implements it.

If you are looking for something that is implementable you have to get out of this restructuring the economy because restructuring of the economy will take five years. For example, we keep talking about the service tax. Now, we keep talking about transactions, the transport companies the Jaipur Golden or whatever you are saying will pay the tax - please remember these people also collect payment by cheque. Do you think about paying by cheque to a doctor? You never get the doctor's service. Think about paying by a cheque to a lawyer. You never will get it. So, let us not talk about things that are not feasible right now.

JAIRAM RAMESH: So, what is feasible?

SUBHASISH: That is what I am trying to say. The one I gave.

JAIRAM RAMESH: Oh, you are on transaction cost.

SUBHASISH: yes, of course, going back to that - you try to think about that. I am not disagreeing with everything that is being said. But is it implementable within the next year and will it give us a huge increase in the revenue? The answer is not. I think we have really had, coming back to the 350 million people. Do not collect the transaction tax. That is fine. Collect one rupee for each account today, this year; stop, once. That is Rs. 350 million. You have to think about it, think like that.

JAIRAM RAMESH: We have about half-an-hour left. We have two or three topics more.

PRABHU CHAWLA: Can I say something? One question which is being raised again and again is on the revenue. What I would request is if we can come to some kind of a consensus that if for a Government collection how much and how.

JAIRAM RAMESH: Prabhu, let me say this because you are ultimately looking for bottomlines. Let me say this - what we are saying is there are three or four things that come out. one is that so far the predominant emphasis has been on expenditure control and expenditure cutting and expenditure switching. That is no longer just an economic issue; that is an issue of political economy and that is why we have found it difficult.

What I think the consensus has been is that while we keep up the efforts to expenditure switching, improving the quality of expenditure, there is need for giving greater importance and put the primacy to revenue raising measures which are directly in the hands of the Central Government. I think that is point number one. The point number two is - if you are looking at things that can be done by the Central Government to raise revenues quite clearly, self-employed, urban professionals, businesses, are not contributing their fair share to the tax revenues of the Central Government. While this is not an annual event, the general direction of what the Government needs to be done should be unwielding the Budget and obviously this is going to be a three to four to five years exercise and particularly the non-filers in this category. This is the second thing.