The new Government may have inherited an economy with a stretched state of finances, but that has not curbed expectations that a friendlier income tax regime for individuals may be on its way.

The country’s tax structure has been the subject of much discussion in the recent past, with about four lakh people paying over 60 per cent of income tax collected in the country. Further, given the persistently high inflation of the past several years, most tax-exemption limits that were set years ago look severely out-of-date. For instance, the tax benefit on housing loan interest was set at ₹1.5 lakh in 2001 (even as property prices have zoomed several times since) while the reimbursement for medical expenditure at ₹15,000 a year was decided in 1998.

The wish-list Financial market regulators have suggested that the Government consider raising the income-tax exemption limit under Section 80C from the current ₹1 lakh limit.

The wish-list would include hike in basic exemption limit from ₹2 lakh to ₹3 lakh; double the housing loan interest benefit to ₹ 3 lakh, treble the 80C exemption to ₹3 lakh and increase the medical reimbursement to ₹50,000 from ₹15,000 currently. Such steps should have several cascading effects on the economy, by putting more disposable incomes in the hands of the consumer.

To attract more investors to equities, a reduction, rationalisation or abolition of the securities transaction tax (STT) is desired. Currently it is lower on options and futures and higher for delivery transactions in the cash segment. An investor buying shares for delivery is charged STT at 0.1 per cent both at the time of buying as well as selling. This may appear unfair to investors taking delivery of the stock, since in non-delivery transactions in the cash and derivative segments, STT is charged only at 0.001 per cent and that too at the time of selling. The revenue received by the Government from this source has been negligible of about 0.2 per cent of GDP. Predictably, the STT revenue rises or falls with financial market activity; in 2007 market boom, the STT revenue peaked at 0.19 per cent of GDP. Even so, it is unlikely to ever generate much higher revenue as per cent of GDP.

Boosting morale Stock market participants also want the Government to take measures for allowing pension, retirement funds and life insurance funds in equity markets. SEBI has already made a proposal to the Finance Ministry to allow up to 15 per cent of the corpus of the Employees’ Provident Fund Organisation in equity and equity-oriented schemes.

Rajiv Gandhi Equity Savings Scheme (RGESS) needs to be reworked and made applicable to all new investments by any individual investor. Apart from these tax reforms, it is necessary to provide impetus to the primary market by way of divestment in key PSUs via IPOs and FPOs. The divestment agenda should encourage retail participation and be a catalyst to more inclusive approach. A balanced budget with lower avoidable subsidies and concrete action plan to boost growth, road map to control deficits, generating employment opportunities, encouraging foreign direct investments in key sectors will go a long way in boosting the morale of investors and improving the investment climate.

The writer is Chairman, Anand Rathi Financial Services Ltd

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