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Today's Paper OPINION

Published: March 24, 2012 00:00 IST | Updated: March 24, 2012 04:33 IST

A risky way to save tax

Most of the financial sector reform measures which figure in the Finance Minister's budget for 2012-2013 do not
have immediate fiscal implications. However, since their primary objective is to seek more efficient market
intermediation between savers and investors, they do have a place in the most important economic policy
announcement, which the budget has become. The belief that such announcements contribute to a feel-good factor
and blunt negative perceptions flowing from say, tax proposals, also explains why they figure prominently in all
recent budget speeches. Important measures of this genre in the latest budget include (a) permitting qualified
foreign investors access to bond markets; (b) simplifying the process of initial public offers (IPOs) to lower their
costs and make them easily accessible to retail investors in small towns by utilising the nationwide electronic
network of stock exchanges; (c) promoting shareholder democracy by harnessing technology. These reform
measures are best appreciated as being part of a broad strategy of encouraging the flow of private, including foreign,
capital. As much as Rs.50 lakh crore of additional investment will be required by infrastructure sectors during the
Twelfth Plan period, half of this coming from the private sector. Further, the budget announcements complement
ongoing legislative initiatives aimed at strengthening the financial sector.
A new equity-linked scheme meant to augment the flow of funds to the capital market has evoked mixed reactions.
The Rajiv Gandhi Equity Savings Scheme seeks to encourage the flow of savings in financial instruments and
improve the depth of the capital market. The scheme, which has a lock-in period of three years, would allow for
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 less than Rs.10 lakh. While more details on the scheme are awaited, it is clear that the
primary motivation for a prospective investor would be the tax rebate it confers. For many in the salaried class the
target group for the new scheme tax-driven investments such as in public provident funds, national savings
schemes and so on are the only form of savings. It is highly questionable whether they should be lured to invest in
inherently risky equity investments with attractive tax concessions. It is hoped that the definition of equity
investment will be expanded to include mutual funds which, after all, have been the officially recommended
investment vehicle for first time investors. Along with usual safeguards, investor education on a continuous basis
will be absolutely necessary.
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08-08-2012 06:54