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Aim to create ecosystem for electronic hardware mfg, says Adhia

In a bid to protect and give a boost to domestic manufacturing, Finance Minister Arun Jaitley has decided to increase basic customs duty (BCD) to 10 percent from 7.5 percent in the capital goods sector. At the same time, the government is also trying to create an enabling environment for the production of electronic hardware, is the word coming in from Revenue Secretary Hasmukh Adhia.

He also says the Finance Bill will lay retrospective tax resolution process into law. India did not have a set conciliatory roadmap for retro tax cases, he adds.

Talking about the FRBM Act, which has been under implementation for more than a decade, and the finance minister’s proposition to constitute a Committee to review the implementation of the FRBM Act and give its recommendations on the way forward, Economic Affairs Secretary Shaktikanta Das says the panel  will look into views on setting fiscal deficit targets versus a deficit range.

In recent times, questions have been raised on the efficacy of having a fiscal deficit target as opposed to a range. To this extent, Jaitley in his Budget speech said: “There is now a school of thought which believes that instead of fixed numbers as fiscal deficit targets, it may be better to have a fiscal deficit range as the target, which would give necessary policy space to the government to deal with dynamic situations.”

Below is the verbatim transcript of Shaktikanta Das and Hasmukh Adhia.

Shereen: When you were presenting your comments short while ago with the Finance Minister at the presser you said that this has been a transformative Budget and Hasmukh Adhia, you said that this has been a realistic Budget. Often we don’t see the two coincides, so transformation and realism don’t often go together because either the expectations are very high especially on tax front that the Budget holds out and especially on the transformation part it often falls short?

Adhia: I said it is a realistic estimate of revenue. In terms of revenue estimate it is a realistic estimate that is all I said. However, Budget can be realistic as well as transformational.

Shereen: Let me ask you and I want to start by talking to you about the comments that you made in press conference where you said that there has been a lot of changes on the indirect tax front which may or may not have been picked up because we are still going through the annexure at this point in time. I understand that a lot of what was already announced by the heavy industries ministry and the capital goods policy has now found its way into the Budget. A lot of what was announced for instance by Ravi Shankar Prasad as part of the electronic manufacturing policy has also found its way into the Budget. Can you take us through the broad items that you have put into the Budget to try and protect domestic industry and also give a boost to domestic manufacturing?

Adhia: There are in fact quite a few, each one of the sector is covered in the indirect taxation changes. So, of course two very significant ones which you pointed out are capital goods industry where in we are taking it from 7.5 percent the basic custom duty (BCD) on capital goods from 7.5 to 10 percent.
On about 96 lines we are increasing the duty in capital goods.

The other one of course, very significant one is the electronic, hardware electronic sector. Last time we had a very successful experiment of starting the mobile production, mobile phone production in India because of the specific duty structure which was created that time. Going by the experience we would like to extend it to some more items in the current year as per the phase manufacturing plan of the Department of Electronics and Information Technology (DEITY); department of electronics has made a phase manufacturing plan.

So, we will be taking some more items this year and then some more items next year. So, like that we would like to create an ecosystem for production of electronic hardware industry in India.

Shereen: Let me ask you about what has been the sort of rationale behind some of the decisions that have been taken as part of the Budget. Given the fiscal challenges at this point in time and given the fact that you also need to stimulate domestic growth and domestic demand, do you believe that this has been a judicious mix of what you have tried to do as far as the Budget is concerned?

Das: This is a very balanced Budget and also if I can take the question which you had posed a little while earlier, that is how you can sort of mix a realistic Budget with a Budget which is transformative, when we say it is a realistic Budget, there are two components to it. Number one, as my colleague has mentioned, the tax projections and all the revenue projections are very realistic.

In fact if you see tax growth projected this year is 11.7 percent that is for FY16-17. It is a realistic Budget for another reason that the Budget addresses all the existing challenges which our economy faces today. The problem of rural distress, the problem which is faced in by the agriculture sector, the problem of rural infrastructure, the problems in the social sector and that takes me to the transformative aspect, there are certain structural reforms also which the Budget has addressed.

Take for example the transport sector which is the most unreformed sector as the Finance Minister has described, now we are opening up that sector through a legislation and it should be possible for average Indian citizen in the rural areas, in urban areas, average middle class, lower middle class and ordinary citizen to get good road transport facilities, bus facilities. So, on the whole, the balance has been maintained between reforms and realism and with regard to the fiscal deficit target, it is a very realistic projection that has been made and it shall be achieved.

Shereen: But since we are talking about fiscal deficit targets and I know that a committee has been setup to review the Fiscal Responsibility and Budget Management (FRBM) Act itself and several questions were put to the Finance Minister and I asked the Minister of State for Finance as well on what now happens to the 3 percent number. 3.5 percent is sacrosanct, the government is committed to that, what happens now to the 3 percent number, how soon will this committee be setup, will it have only government appointees, will it also have external members, can you share some light on what we can expect on that?

Das: The committee will be setup very shortly. It will have external members of course because if it was to be done within the government, we could have done it ourselves. Government would like to have external inputs on that. The rationale behind having a committee and if you remember what the Finance Minister said in his Budget speech, he prefaced it by saying that while remaining committed to principle of fiscal prudence and fiscal consolidation, so, therefore fiscal prudence and fiscal consolidation continues to be important for the government.

We have a challenge, today we live in a very dynamic world where as everybody says, the uncertainty and volatilities have become the new norm. So, should government not have a policy space? Supposing you are in a good year, the revenues are buoyant and you are doing well, why 3 percent, we can afford to do even 2.7 percent and conserve that money to sort of eliminate some of your past debts or keep that money for your future expenses or if the economy is in stress, why not the government have a target of 3.1 percent or 3.2 percent? So that is why the range concept, this is one idea which has come and this background it was felt that let a committee look at it and give its expert opinion to the government, the government will look into the recommendations and take a decision.

Shereen: I understand that this was a part of the recommendations made by the committee of secretaries that submitted their recommendations to the Prime Minister on why have an absolute number, why not actually have a range that will take into considerations revenue collections and so on and so forth while deciding?

Das: Let us not go into who recommended what but to put things perspective it was a Finance Ministry suggestion. We did get some suggestions from outside. Committee of secretaries have given several other recommendations also but not this particular one.

Shereen: Let me ask you about what we are seeing happen as far as retrospective tax matter is concerned because a onetime window has been given to try and settle on those retrospective tax cases. I understand now that this is the same conciliation process that we have been attempting to do with the likes of Vodafone for a long time. What is different from the already announced conciliation roadmap that was laid out by the Central Board of Direct Taxes (CBDT)?

Adhia: There was no conciliation roadmap laid out, we were sort of giving a signal that we would be willing to consider a proposal for conciliation. However, one must realize, FM also mentioned in the press conference that as long as the law is there the notice for taxation will stay. The sovereign doesn’t have any power to let go off any taxes on its own. So, what we have done this time is that we are going to provide for it in the law itself. The Finance Bill chapter no 10 contains specific schemes for dispute resolution in respect of retrospective cases. So, if they are willing to settle the case at that level then now the law itself empowers the government to do so.

Shereen: Talks have been on at least with one specific company and that is Vodafone. Are they at all willing to take you up on your offer or paying the principal and as long as you waive the interest and the penalty?

Adhia: It is for them to decide but the government has given a clear signal that this is how far we can go and that is it.

Shereen: Do you believe that this window that the government has opened up by way of this retrospective chapter in the finance bill, are we likely to see a resolution on the likes of the Vodafone kinds of cases?

Memani: I doubt it if they are likely to go in for something like this. However it also in many ways says that given the current circumstances this is the best they could have done and then they will leave the rest to the judicial process.

Shereen: But let me ask you this and this is obviously a political call at the end of the day but the government has the numbers, if you are willing to go this far, why not go the whole way and decide to repeal the retrospective amendment altogether?

Adhia: It is a question you must ask Finance Minister now.

Shereen: Was it discussed?

Adhia: What has come out is this decision so you must respect that.

Das: Various options are always considered by the government. We have to also remember that this was a legislation which was passed by the parliament and so government has considered all possible options of dealing with this problem.

In the first Budget, the Finance Minister gave an assurance that the government will not henceforth undertake any retrospective legislation to create a fresh liability. That assurance was again repeated and reiterated in the last Budget. This time, number of suggestions came and government after considering all options has taken this decision.

Shereen: Let me also ask you about the voluntary disclosures scheme or the IDS and you have said that this is different from the Voluntary Disclosure of Income Scheme (VDIS) of 1997 because that just required you to pay 35 percent or so on and so forth and here you now need to pay about 45 percent. You haven’t budgeted for this in the Budget. Take us through what the expectation really is as far as the IDS is concerned?  

Adhia: I don’t think anybody should have any expectation out of such schemes. When we declared the black money scheme also, we specifically refused to set any target for it because you cannot set a target for it.

More to follow…