The Finance Minister spoke eloquently about a direct taxes scheme in Part A of his Budget speech, but did not explain the nuts and bolts of it in Part B where it belonged.
A proposal as seminal as sizeable deduction for investment in equity, meant to entice the middle class, does not even find a place in the Finance Bill, 2012. Obviously, it must have been an afterthought. What, therefore, has set the speculative mill agog is the following terse statement in Part A of the Budget speech on March 16.
“To encourage flow of savings in financial instruments and improve depth of the domestic capital market, it is proposed to introduce a new scheme called Rajiv Gandhi Equity Savings Scheme. The Scheme would allow for (sic) income tax deduction of 50 per cent to new retail investors, who invest up to Rs 50,000 directly in equities and whose annual income is below Rs 10 lakh. The scheme will have a lock-in period of 3 years. The details will be announced in due course.”
Dangerous portents
While it is less than fair to start dissecting a scheme merely on the basis of its contours, some constructive criticism can help in drafting in positive inputs. Will the scheme extend to both primary and secondary market investments?
From the Ministry of Finance's announcements, it appears the government is considering allowing this benefit; this is to encourage investments in top 100 companies' shares listed in NSE and BSE.
If this is so, the portents are dangerous. What requires a leg-up and the taxman's indulgence is the primary market that has been languishing for a couple of years now, with the recent MCX issue being just a flash in the pan.
It is not as if the primary market is safer vis-à-vis the secondary market, what with rapacious premiums denying listing gains and denting investor confidence.
Curiously, the reference to NSE and BSE in the officialspeak is at odds with the Finance Minister's speech where he refers to ‘new retail investors'.
Retail investors as per SEBI norms are those who invest up to Rs 2 lakh in an IPO or FPO or offer of shares. Necessarily, therefore, this rules out excursions in the secondary market.
It would also be pertinent to be clear about whether a person who has had interface with the share market already, is eligible for this tax benefit. The use of the prefix ‘new', qualifying the term retail investors in the speech, suggests that the benefit will be conferred on first-timers alone.
Mutual Fund industry
There is also considerable merit in the clamour of the mutual fund industry that the tax benefit should extend to investments through mutual funds to the exclusion of direct investments.
For a rookie investor, at whom the benefit is targeted, investment through the conduit of mutual fund is anyday safer than direct exposure to the volatile stock market.
Though the Finance Minister's speech ought not to be dissected with the same fine-tooth comb that would apply to a legislation, yet the use of the word ‘directly' shows that the conduit of mutual fund was not in his mind. There is also some talk of reducing the lock-in period from the proposed three years to just one year, perhaps to make the scheme compatible with what constitutes long-term capital assets.
Shares have been singled out for a shorter 12-month holding in order to acquire the halo of a long-term capital asset, which is why the officials are veering round to the view that the lock-in period under the proposed scheme should also be just for 12 months.
But then, two wrongs do not make a right. To confer 100 per cent tax exemption from shares sold through recognised bourses after 12 months of acquiring them is not only wholly unmerited, but also is responsible for the short-termism that has come to characterise investment decisions and horizons. When bank deposits qualifying for tax deductions can be locked in for five years, there is no reason why investments in equity should not be locked in at least for three years.
Safeguards
One hopes when the scheme is fleshed out, the much-needed safeguards are put in place. For example, an investor who has invested much more than the qualifying amount of Rs 50,000 in equities should be called upon to identify the specific shares in respect of which he wants the tax benefits, without allowing him the luxury of doing so at his will at a propitious time.
This he must be called upon to do through his income tax return. However, the speech contemplates tax benefit only for those who invest not more than Rs 50,000. And those trifling with the scheme by breaching the lock-in period must be penalised, as indeed is the case with other tax-oriented schemes under Section 80C.
The other nuts and bolts issue is ensuring that the taxpayer availing the benefit indeed does not have income greater than Rs 10 lakh. If, for example, it turns out on assessment that one's taxable income is much more than Rs 10 lakh, not only should he be called upon to pay the additional tax, but also the tax benefit claimed under the scheme must be wrenched away.
One hopes the Finance Ministry also prevails upon depositories to offer no-frills accounts to cater to the needs of such greenhorn investors. Any fancy fees would put them off, given the fact that the entire stock market is practically operating under the digital/depositories mode.
One wishes the government had done its spade work before coming up with a scheme that shines as a beacon in an otherwise lacklustre Budget. Perhaps it was under some belated pressure to announce at least something that would placate the market and middle-class tax payers.
(The author is a New Delhi-based chartered accountant.)