How to raise revenue and be fiscally prudent: Nilesh Shah

By Nilesh Shah

Fiscal Deficit for FY18 is likely to exceed the budgeted estimate of 3.2 per cent by about 0.3 per cent. This is driven by lower GDP growth and GST collections. Other receipts like dividend from the RBI and spectrum sale proceeds have also fallen short of budgeted estimate. Expenses have also shot ahead of the estimates. The fiscal deficit target of 3 per cent for FY19 looks difficult to achieve as the Government has to do heavy lifting on capital expenditure. Higher oil prices are also restricting the fiscal space. From Industry to Individual everyone is asking the finance minister to be liberal on spending but benevolent on tax collection and yet be fiscally prudent.

Kautilya mentioned that taxes should be collected like bees collect honey from flowers. Here are my recommendations to the finance minister about how to raise revenue like a honey bee:

• Plug the loophole in bonus stripping and dividend stripping. Nowhere in the world bonus shares are treated at zero cost. Look at all the people who sold their companies over last many years and calculate what tax was paid on those gains. Govt can save anywhere between Rs 15,000 crore and Rs 25,000 crore by bringing bonus share taxation at par with global standard. It is grossly unfair that a small businessman when he sells his firm is made to pay full tax, but big businessmen are given this loophole to exploit with impunity.

• Monetise VSNL land in FY19. That 700- acre plus land can fetch anywhere between Rs 10,000 crore and Rs 15,000 crore. You can take the credit of completing the work pending since 2002.

• Cigarette has been taxed heavily compared to non-cigarette tobacco products. A decade back cigarette were taxed 20-25 times more than non-cigarette tobacco products. Today this ratio ranges between 55 and 60 times. This heavy taxation has created a large market for smuggled cigarettes in India. The government is loosing anywhere between Rs 5000 and Rs 10,000 crore as per market gossip. Rationalisation of taxes across tobacco products will ensure reduction in smuggled cigarettes, and increase tax kitty.

• Estate duty is an acceptable tax in developed world. For e.g in Japan, estate duty is levied at 30 per cent on worldwide assets. Levy of estate duty on HNIs can create good revenue flow. There are many loopholes around Gift, Trust etc which have made our tax net ineffective. The same needs to be tightened for better tax compliance.

- Create a sovereign fund to manage external reserves of India. There are enough role model from GIC to ADIA which can help improved yield on foreign exchange assets. Even if we can improve yield by 2 per cent on $400 billion of forex reserves it will amount to an income in excess of Rs 50,000 crore. The Swiss National Bank last year made profit of $55 billion or more than 8 per cent of Swiss GDP. Obviously, we don’t want the RBI to become an aggressive manager like the Swiss National Bank, but a calibrated risk taking is inevitable in today’s world like what China, Norway, the middle east countries and Canada are doing.

- The government divestment on a piecemeal basis. They sell PSU companies in small parcels at a discount in the secondary market. If the government can pursue strategic divestment like Hindustan Zinc or Maruti it can fetch a significant premium. A 25 per cent premium on half of the divestment target of last year amounts to Rs 9,000 crore.

- The government is asset rich. There are number of real estate, land, surplus assets, road, port etc which is owned by the government. Such assets can be sold to investors to raise money which can be invested in new infrastructure projects. World is surplus with liquidity and hungry for quality assets. Monetisation of assets across the government and railways can raise substantial sum of money for further investment.

- Custodian of enemy property has assets exceeding Rs 1,25,000 crore. Some of them are liquid like shares and some of them are illiquid like real estate. A time-bound programme to liquidate those assets can raise substantial amount of money for next few years.

- The government has created corpus through collection of cess under various categories from highway development , education cess, universal basic obligation to forest conservation. As per the CAG report of FY15, Rs 144,522 crore is lying unutilised as unspent cess in various schemes. Some of those can be utilised in the general Budget after appropriate changes in their spending clause.

- levy tax on agriculture income for HNIs. While it is understandable that poor farmers are not taxed, it is beyond logic why rich farmers aren’t taxed. Today many rich people save tax by declaring bogus agricultural income. It is important to ensure HNIs are taxed irrespective of whether they earn their income from farming or otherwise.

- Unclaimed dividends after a few years are transferred to the central government. Similarly, unclaimed deposits, mutual fund units, PF dues and insurance claim/maturity should be transferred to the central government. Law of limitation will ensure that the govt becomes the beneficiary of unclaimed money on a recurring basis. These can raise substantial resources for the government.

- The RBI has very high capital adequacy compared to developed world central banks and pretty high capital adequacy compared to developing world central banks. While investors and rating agencies will want RBI reserves to remain untouched, they have not complained when US Fed bought sub-prime loans, ECB bought junk bonds and Bank of Japan bought equity in Japanese companies. We should look at utilising RBIs excess reserve for the benefit of Indian Economy.

- Indian tax compliance is poorer than many African nations. It won’t be unfair to say that other than the salaried class, most Indians don’t pay their share of tax properly. It is important to widen tax net through better data analytics. Submission of balance sheet should be a must for all tax payers. Superficial entities such as HUF, AOP, Trust need to be taxed appropriately.

- Indians own more than $1 trillion of precious metals and diamonds. It is important to tax them. Most of these are with HNIs, religious institutions and black money holders. A flat tax of 2 per cent can yield more than Rs 40,000 crore. We’ve seen not many people paid wealth tax for lack of stringent penalty. A severe penalty like confiscating undeclared gold will push many people to comply with precious metal and stone tax. Keeping high exemption limit will ensure that majority of household won’t have to pay tax on their holding.

(The author is MD of Kotak Mahindra Asset Management Co Ltd)