Run-up to Budget: 4 ways to enhance retail interest

On February 29, the Budget for 2016-17 will be rolled out. There is no doubt that this particular Budget will be critically viewed by many in India and overseas.

Everyone will be looking out for initiatives and policy reforms that will accelerate economic growth. Perhaps, this is the Budget that will determine whether the government’s thoughts are aligned with its action. Here are four ways to help attract more retail investors.

Abolish Security Transaction Tax

The transaction volumes in the markets are nowhere near the volumes of late 2007-early 2008 period. With drop in volumes, the liquidity in the Indian market has taken a hit.

Clearly, liquidity is provided by active traders who operate on thin trading margins. However, the problem is that the STT eats into the active trader’s wafer-thin margins. It would make sense for the ministry to abolish STT, attract more active market participants to improve the overall liquidity, and thereby make the markets more attractive for long-term investors.

Reconsider audit requirement

Section 44AD requires the books to be audited if the profits made in the financial year are less than 8 per cent of the turnover or if the turnover is more than ₹1 crore.

However, the calculation of turnover is not intuitive like in other businesses; the calculation in markets is rather convoluted. The problem, however, is that the majority of retail trading population does not trade the market full time (they have other sources of income — salary, small business), and invariably have profits that are less than 8 per cent of the so-called ‘turnover’.

This would require them to maintain books and have them audited by a chartered accountant. The audit fees itself would eat away a portion of the profits made during the year.

Such arcane/convoluted tax regime discourages retail participation and leads to non-compliance. The ministry should revisit this tax rule and come out with a more practical approach to scrutinise profitable traders.

Increase savings under Section 80C

The maximum permissible limit for investment under 80C is ₹150,000. It is time the government considers a revision here. Increasing this limit will encourage more retain savings, which means the inflows in the markets will increase. Of course, a portion of tax is foregone, but this will be more than compensated in terms of increasing the overall liquidity in the market and supporting the long-term economic growth.

ELSS and beyond

Inflow into the equity scheme in 2015 was highly encouraging; inflow was in excess of ₹100,000 crore. Probably for the first time, the Indian investors opened up to investments in financial securities as opposed to investing in real estate and gold. The government should recognise this change in investor’s preference on an urgent basis and encourage domestic investment in financial securities.

As a step towards this, the government should allow mutual fund investment in all open ended equity schemes eligible for deductions under 80C and not just equity linked savings schemes.

The writer is, CEO, Zerodha. The views are personal