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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 nothave immediate fiscal implications. However, since their primary objective is to seek more efficient marketintermediation between savers and investors, they do have a place in the most important economic policyannouncement, which the budget has become. The belief that such announcements contribute to a feel-good factorand blunt negative perceptions flowing from say, tax proposals, also explains why they figure prominently in allrecent budget speeches. Important measures of this genre in the latest budget include (a) permitting qualifiedforeign investors access to bond markets; (b) simplifying the process of initial public offers (IPOs) to lower theircosts and make them easily accessible to retail investors in small towns by utilising the nationwide electronicnetwork of stock exchanges; (c) promoting shareholder democracy by harnessing technology. These reformmeasures 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 theTwelfth Plan period, half of this coming from the private sector. Further, the budget announcements complementongoing 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 andimprove the depth of the capital market. The scheme, which has a lock-in period of three years, would allow forincome 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 theprimary motivation for a prospective investor would be the tax rebate it confers. For many in the salaried class thetarget group for the new scheme tax-driven investments such as in public provident funds, national savingsschemes and so on are the only form of savings. It is highly questionable whether they should be lured to invest ininherently risky equity investments with attractive tax concessions. It is hoped that the definition of equityinvestment will be expanded to include mutual funds which, after all, have been the officially recommendedinvestment vehicle for first time investors. Along with usual safeguards, investor education on a continuous basis

will be absolutely necessary.

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