Were you expecting backlash on the indexation proposal?

Yes, some kind of backlash is expected. See what happens is there is a very small minority of people, majority of the people are welcoming it, but they are silent, they don’t come out so vociferously because they stand to gain.

But do you think somewhere some clarity is missing?

The part that it is grandfathered till 2001 is not stated clearly. We have been talking about it. There is always scope for better communication, multiple means of communication. So many people are there, to reach out to them is a challenge. So we try to do it and we will also be having our teams going down at the state level.

Is the possibility of this grandfathering cutoff 2001 being brought forward?

That was discussed. But it was decided against. Because taxation, you know, this taxation is actually prospective. Those who sold before this stage (July 23), they got the benefit of the rates that existed. We have not introduced any retrospective taxation. So to give now a benefit of the tax rate which exists today retrospectively, you know, a lower tax rate for some, that also should not be done.

You have said that 88 per cent of the capital gains income is earned by those who have income of more than Rs 1 crore.

Yes. So, this tax is actually on the upper middle and the upper income classes. See, the income from the property that you sell, house property or commercial property, whatever it may be. You sell one property, you buy another house property with the capital gains of the proceeds, then there is no tax in the same city or in another city. You shift residence, there is no tax.

You had, let’s say, Rs 10 lakh, you bought a house, you sold it for Rs 1 crore or Rs 50 lakh or Rs 30 lakh, whatever and you keep it with you. You don’t reinvest in (property), you reinvest in shares, let us say. You got that money, Rs 20 lakh or Rs 50 lakh or Rs 60 lakh, depending on the gain, it’s an income. Now, if you had invested that money in shares, Rs 10 lakh, and you are getting back Rs 40 lakh or Rs 30 lakh it is taxed even if you invest it in some other share. So why should this Rs 30 lakh be treated differently when it is coming from house property vis-à-vis if it is coming from shares or any other method. You give me one reason, economic reason. If you reinvest it in a house, it is not taxed.

That limit is Rs 10 crore…

Yes that limit is Rs 10 crore. Beyond Rs 10 crore, it is taxed, which earlier was 20 per cent with indexation. Now the indexation goes away but the rate reduces, so that is fair. Slightly higher or slightly lower or maybe very lower also, depending on how much the property has escalated. If the escalation is much higher than the inflation, they stand to gain. If the escalation is not there or is less, vis-à-vis the inflation, then maybe there is a little more tax. But the tax is only 12.5 per cent, it is not 30 per cent or 39 per cent (as it’s) for those who are above Rs 2 crore, which they pay when they get a salary. Someone who gets an income of Rs 1 or 2 or 3 crore, out of this, he will pay only 7-8 per cent or 12.5 per cent.

So, this is basically, number one, a simplification exercise. Number two, a removal of tax arbitrage among different asset classes. Number three, a slight reduction in the difference between the tax on capital gains vis-à-vis tax on other income.

Were the numbers too high for capital gains?

In 2022-23, we got around Rs 1.06 lakh crore from both long term and short term capital gains.

What is the split between short term and long term capital gains?

Short term is about Rs 20,000 crore, remaining is long term capital gains.

And why is it 12.5 per cent? It’s somewhere in between kind of a number.

You would have asked me the same question had we done any other number. So, it’s a very small increase. We did not want to burden the taxpayers too much.

Was there any kind of concern about evasion or probably laundering in this indexation provision that people were probably misusing it?
No. Generally, people buy and sell at circle rates. The circle rates may be low or high, whatever it is, but people buy generally at circle rates. So the evasion angle, to that extent, is mitigated. If they are selling or buying at higher rates than that, then it was there earlier, and even now it will remain. For listed shares, it is already through the market exchanges, so there is no issue. 2.5 per cent is not too high to increase the tendency of evasion.

But the apprehension, which industry players are saying, is that it may result in a rise in cash transactions in real estate, wherever circle rates are lower. Would you agree with that?

My understanding is that generally people buy and sell at the circle rate. 2.5 per cent is a small change.

What about the comprehensive review of the I-T Act? You have said that it’s not going to be a new direct tax code, it will be a comprehensive review…

It may or may not be. Most probably it will be the same but we may opt for a new code. I mean if we change the name, it becomes a new Act. What form and shape (it will take) is not decided. But what has been decided is that we will review it within a period of six months.
The purpose is to make it simple, the purpose is not to substantially change because we have been making changes year on year. We have been plugging wherever loopholes are there. We have been simplifying. The primary purpose here is to simplify, make it easy to read, understand, make it easy to implement for the tax authorities, easy to comply for the taxpayers, tax practitioners, to reduce the compliance burden, reduce the litigation and the disputes. So it is basically that.

In previous budgets, revenue buoyancy was projected greater than one. This year it has been kept closer to one. So is a slowdown in revenue collections expected, especially GST?

See, year on year it is actually not possible to have high buoyancy because efficiencies, the impact is visible in that year only. Once it is there, that level is set, so that benefit is there available for years to come but it doesn’t show in as a buoyancy. Any gains in efficiency, once I get it, then I have got it forever. It will not mean that the buoyancy will again be high. That will be a result of further gains in efficiency. So to expect gains in efficiency year after year after year of the rates that we got is not a theoretical possibility.

GST collections have come down a bit, especially the pace of growth. So going ahead, do you expect it to further taper off?

Growth is there, maybe the growth rate, there will be some ups and downs in the growth rate.

In this whole indexation and capital gains proposal, some experts are saying that you are tightening the net around the same set of people in terms of taxpayers. It’s not an expansion of the tax base. A significant number of people are still out of the tax net.

As you are aware, the number of taxpayers has actually increased, whether it is the direct taxes or indirect taxes. The numbers have actually increased and the endeavour is to further increase it. A lot of it will also happen through other means, not necessarily taken by the Department of Revenue or the tax departments, which is, the formalisation of the economy as it happens, the increase in the digital public infrastructure etc. All those things will help in expansion of the tax base.

In Customs tweaks, is there a directional change? Generally we have seen rates going up over the last ten years. There have been corrections for inverted duty structure, simplification in terms of input sources but in terms of the trajectory downwards, is that something a one off or you see it continuing?

No, here Customs duties basically we are saying rationalisation. It doesn’t mean that we will reduce the rates. What it means is that we will try wherever there is a duty inversion, we will correct it. Number of rates in Customs, can we reduce the number of rates? That is the primary exercise so that the classification disputes reduce.

There has been a sharp duty cut for gold. Will there be a commensurate reduction in duty for gold findings also?

That has been done.

Do you expect that this will reduce smuggling?

The primary purpose is to promote this industry because it is a labour-intensive industry. That is the primary purpose. Yes, we do expect that smuggling will also come down. Smuggling was at historic highs. Last year, we did huge seizures, record seizures. We expect that it will reduce but the primary purpose is to promote this industry.

Also, was there a concern about gold being smuggled through the MFN (most favoured nation) route especially though some African countries?

That came in quite late in the day. The decision had been already taken. That is a kind of incidental benefit.

But the routes were being used to smuggle gold…

Yes. It will help reduce that.

Decriminalisation for many provisions has been done

We believe in a trust-based tax administration. An administration which is not confrontationist and is more collaborative. We have got the Vivad se Vishwas scheme, rather than disputes there should be trust. We have raised monetary limits. We have decriminalised, de-penalised certain provisions under the Black Money Act, decriminalised TDS and compounding provisions. Effort today is to use more and more technology, faceless assessment is one example, GSTN is another example. Make it as far as possible convenient for our taxpayers, to pay their taxes, they are doing a great job. I need to recognise their efforts and that will be the guiding philosophy.

Block reassessments have been brought back even as they were termed as a failure earlier…

There were some issues and whatever were the reasons for failure, those have been corrected now. Previously what was happening was that only the evaded income was being assessed and the other regular assessment was also going simultaneously. So that has been merged now, so it will be done together now. This was the primary reason.