File photo of Finance secretary Hasmukh Adhia

Finance secretary Hasmukh Adhia has been leading the government's move to reform the tax administration and has played a key role in implementing GST. In an interview to TOI, he explains the rationale behind the levy of long-term capital gains tax. Excerpts:

Can you help us understand the rationale behind the reintroduction of longterm capital gains tax?

¢ It’s not a good idea to have a completely different, and sweet, dispensation for one type of capital gain vis-à-vis others. This tends to skew investment and people prefer an option where there is no tax. The FM mentioned Rs 3.67 lakh crore capital gains accrued last year. Suppose this was the salary income of people, it would have been taxed at 20% or 30%. This is a gain which is not accruing from any effort, but is just an investment gain. It is only reasonable that we look to get some revenue from this class of income.

In the past the governments have shied away from this decision fearing an adverse impact on the stock market. How easy or difficult was this call? Did the experience of renegotiating the Mauritius and Singapore treaties embolden you?

¢ The two treaties were coming in the way so far but now that we are at the fag end of that, we went ahead. Two, the share of domestic investment is now going up compared to FII. Plus, with 10% marginal rate, nobody will feel a significant pinch and go to Mauritius to invest in India.

You spoke about the emergence of domestic investors. Equity mutual funds will also face the tax…

¢ Usually, small investors come via mutual funds and we have protected that class by exempting gains up to Rs 1 lakh.

The middle class appears to be unhappy given that the benefit of standard deduction has been taken away by a higher cess...

¢ Not really. A 1% additional cess is on the tax and not on the income. If somebody’s tax liability is Rs 40,000 he will pay Rs 400. But the benefit of standard deduction will be Rs 40,000 and for someone in the top tax bracket, who does not get the benefit of conveyance or medical allowance, the gain is Rs 12,000. The expectation may have been higher but as the shastras say, expectations are always the cause of misery. The government had a choice to make.

The revenue estimates seem to be high. For instance the GST collections are projected to grow 67%. Is it because you will collect the tax for a full year instead of seven-eight months in this financial year?

¢ That’s one reason. Second, a lot of transition credit is available this year, which will be used up. Third, there will be normal buoyancy due to the tax net spreading and the anti-evasion measures kicking in.

Some people are suggesting that the overall numbers are ambitious.

¢ We have been very conservative. In areas like corporate tax, the impact of GST will be visible. The balance sheet of manufacturing companies look better this year due to reduction in the effective rate (due to GST) and efficiency gains.

On the expenditure side too, the allocations seem to be conservative such as for the health insurance scheme.

¢ Our expenditure has been fully provided for. This year’s allocation (for health insurance) is only token and we will increase it, when needed. It will take around six months to roll out the scheme and states will take time to adjust.

Is a fiscal deficit target of 3% of GDP really achievable given that successive finance ministers have failed to achieve the target?

¢ It is now possible to reach it given the structural changes that have been ushered in. Demonetisation and other measures will bring more revenue on the direct tax side and the other is GST, which has a link with direct tax revenue.

