Tax breaks will not help equity flows
Arjun Parthasarathy Published: 11th February 2013
The government is trying to push the RGESS (Rajiv Gandhi Equity Savings Scheme) by giving it extra tax sops. The RGESS is an equity scheme where an individual earning Rs 10 lakhs or less per annum can save 50% in tax for investments up to a maximum of Rs 50,000. The government believes that retail investors will flock to the equity markets through this scheme and help improve savings rate in financial assets.
The RGESS scheme is more R(e)GRES(S) than PROGRESS. The government by now should have realised that just by giving tax sops will not work in attracting investors to equity markets. The abject failure of mutual funds in attracting retail investors to equity markets is a clear example of retail investor’s apathy towards equity. Mutual funds retail equity assets are just around 18% to 20% of total assets and this industry is now close to fifteen years old (leaving out UTI that has been in existence for ages). The ELSS (Equity Linked Savings Scheme) funds constitute less than 4% of total mutual fund assets.
The fact that long term gains in equity do not attract any tax is enough of a tax incentive for investors to invest in equities. The RGESS is just one more scheme that offers tax sops to incentivise investors to invest in equities. Investors will not bite this tax sop unless there is a definite benefit in investing in equities. In fact if retail investors perceive that there is a definitive advantage in investing in equities then they will flock to the market, tax sops or no tax sops. Investors do not mind paying taxes as tax is paid on gains, unfortunately retail investors are nervous on whether they will see gains at all on equities given the current state of economic affairs.
It is a wonder than anyone earning Rs 10 lakhs or less will be able to save at all. Income taxes take away a minimum of 10% and a maximum of 20% of income. Consumer Price Inflation (CPI) running at 10% per annum ensures that income is worth less day by day. Sky high property prices and high loan costs ensures that if anybody has purchased property has sold more than half of his or her lifetime paying off property loans. Topping it all is rising cost of education, power, transport (all of which is not captured fully in the CPI). The cost of petty corruption that is pretty large is not all captured in the CPI.
Health care costs are a big concern for the public as they have to care not only for their own health but also for the heath of their children and their elderly parents. One health set back is enough to wipe out lifetime savings.
The government instead of the R(E)GRES(S) scheme should have a PROGRESS scheme where the incentive to invest in equities come from the attractiveness of the markets due to good economic policies of the government. The government should tell investors that it would frame policies that will help retail investors have more money to invest in equity markets. Such policies would mean reducing inflation, improving infrastructure, lowering wastage of scare resources that gets wasted through subsidies, curbing real estate speculation, keeping down cost of education and improving health care benefits.
The government is really wasting its time on the RGESS. The time spent of RGESS could well go into better governance and that will automatically create the right atmosphere for equity investments. There is nothing that attracts investors more than the expectations of strong returns in a transparent asset class that is equities.
It is high time that the government stops all sorts of tax schemes for investments and instead just focus on the right policies for growth. Investments will happen automatically on the back of the latter.
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