It’s time to revisit income tax rates: Bibek Debroy, Chairman PMEAC

It may be time to revisit personal income-tax rates and give an option to individuals to either retain exemptions or pay lower tax, feels Bibek Debroy, chairman of the Economic Advisory Council to Prime Minister Narendra Modi. In an interview with ET, he also favoured change in the inflation band targeted by RBI to focus on the upper tolerance limit of 6%. Edited excerpts:

What is your take on the current slowdown? Many economists feel it is not just a cyclical slide but a structural slowdown that would require deeper reforms to overcome…

Slowdown should never be expressed as binary as it has elements of both in this. Several structural reforms relate to land, labour and skills, natural resources and little bit of disinvestment and privatisation. Structural reforms have taken so long because most of these subjects are in state or concurrent list. Structural reforms are important, but it is not a magic wand that suddenly you can do it.

External world is not very benign for growth. It is not suddenly going to improve and, therefore, contribution of exports to growth is not going to improve. All India growth rate is fundamentally an aggregate of states’ growth rates. There are several states in India growing at 6-6.5% and, if that is the case, then how do you expect India to grow at 8.5%. It is logically not possible.

So far as privatisation of CPSEs (central public sector enterprises) is concerned, it is a process with a timeline. You can’t rush it through. The government has made it very clear that it is serious about privatisation.

What is your estimate for growth?

This year we are around 5% and next year 6-6.5%. I think we are on a band of 6-6.5%. Expecting anything significantly higher in two years would be somewhat unrealistic. Do you think we can grow higher if global economy supports?

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Global thing depends on exchange rate, demand side, supply side. You have little bit of freedom on the supply side, but exchange rate manipulation is not possible. So we are essentially left with demand. Potentially, if land and labour reforms happen and states begin to grow fast we might go up to 7-7.5%. But it is safer to talk about 6-6.5%

We have had low inflation for some time that has impacted nominal GDP. Do you see it playing on overall sentiment?

One of the macroeconomic successes of the Narendra Modi government which is not appreciated is low inflation. All central banks are conservative; RBI is also conservative. I think a 6% targeted inflation( Inflation target is 4% +/- 2% , with 2% being lower tolerance limit and 6% being the upper tolerance limit) is a better idea than a 4% targeted inflation… not saying suddenly inflation should be higher because we all know inflation is regressive tax… higher rate of inflation is also good for government revenues. Hope RBI and monetary policy committee take note of it and recognise this.

So, do you think it is it time to revisit the current 2-6% band for inflation?

May be yes. Perhaps, within the existing band there is scope for relaxing it little bit and, after all, much of the inflation does not have much to do with monetary policy.

With nominal GDP being where it is, is it time the government relax its fiscal goals, particularly the fiscal deficit target?

Legally, there is enough leeway in the FRBM (Fiscal Responsibility and Budget Management Act) for deviating from FRBM. Junking FRBM is a terrible idea and no one is even contemplating that. Fiscal deficit is invariably expressed as a ratio of GDP. So if GDP is lower, automatically, even if you do not compress expenditure, the deficit looks high.

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I don’t think per se that higher deficit-to-GDP ratio will lead to alarm bells as long as we have very credible roadmap for fiscal consolidation and reducing it. Reducing the deficit by more than about 0.5% to GDP a year is going to be very difficult because 15th Finance Commission will submit its recommendations…

Corporate tax has been rejigged but there is apprehension that it only addresses supply side situation. Do you think it is time to revisit the personal income tax structure to help boost demand?

Yes, with a qualification. The corporate tax rate cut has given you the choice. The unincorporated segment of enterprise also pays personal income tax. So fairness demands that if the corporate income tax rate has been reduced, this should also be reduced, except it has to be reduced with the removal of exemptions.

I am not privy to what budget is going to do, but what I will recommend is that the budget should also give me an option that either you retain the exemption and remain where you are or you go for lower rates.

The second element is, definitionally personal income tax has an element of progressivity. So, it cannot be a situation where personal income tax rate is reduced to 15% for everyone. It has to have progressivity. We need to revisit the exemptions because exemptions or revenue foregone is anything between 5-5.5% of GDP.

Is it time for rationalisation of GST structure, or should the government wait for growth to get back on track?

It is time to rationalise GST rates, but it may not happen. This is not a perfect GST. In an ideal GST, all products should be part of it. Ideally, a GST should have a single rate, but realistically it cannot be a single rate. Most countries in the world have three rates. It’s alright if we have three rates. It’s for the GST Council to decide what those three rates are.

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At the time CEA Arvind Subramanian had done an exercise that if government does not lose revenue, the average GST rate should be about 16%. The average GST rate now, based on last computation, is 11.6%, which means one is losing revenue.

If I have got guaranteed revenue compensation, then every state wants more and more products at zero. We have a systemic problem there. The revenue compensation, guaranteed till 2022, has led to perverse incentive (for having more products at zero) and as long as we have that, I am not very optimistic about the movement towards three rates, desirable though it should be.

In a situation where you may have limited degree of freedom for the government to impart a fiscal stimulus because of deficit reduction compulsion, you certainly don’t want a situation that 12% becomes 18% purely because of revenue consideration, and it actually becomes perverse in terms of making slowdown worse.

Rates are going to be moved up, depending on the item, sooner or later. I’d much rather want the 0% to become 5%, which is the bulk, rather than 12% becoming 18%. Other part of GST is on the basis of invoice matching. With the best of intentions, MSMEs were left out below a threshold. One way of doing is to make GST registration mandatory for MSMEs though they may not pay taxes.

Is India’s intent to get manufacturing industry going turning it protectionist?

When the economy or manufacturing is not doing well it is reasonable to understand why reductions in rate becomes more difficult and it is also possible to understand that why there are pressure groups that argue for jacking up import duties. Yes, protectionism is not an answer, but I don’t think there have been any significant increases in import duties.



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