Indian taxpayers are now mature enough to make their savings and investment decisions independent of policy nudges by the government, finance minister Nirmala Sitharaman said on Friday, seeking to allay concerns over a further dip in the savings rate due to the progressive removal of various tax exemptions and deductions meant to promote savings.
The recent Budget removed 70 of over 100 incentives linked to savings and investments in designated instruments like insurance policies for those who opt for the new simplified, lower-rates personal income tax (PIT) regime. The move, a section of analysts and the insurance, mutual funds and real-estate players have said, could further reduce the already-depleted domestic savings pool and dry up funds for investors, in a slowing economy.
Addressing market participants and representatives from the financial sector here, Sitharaman said that the ‘old-fashioned’ way of directing investments to insurance policies and other products was limiting the options of tax-payers on what they could do with their money. She said, “We thought we should open it up and leave it to that person who has got the money to decide where he wants to put it.”
“I feel most of us are underestimating Indian taxpayer. If he has money in his hand, he is the best judge where he wants to put it — whether to save it or spend it on a house or vehicle or insurance,” she said. From 34.6% in FY12, India’s savings rate has fallen to 29.2% of GDP in FY19 and is estimated to dip further to 28.5% or thereabouts in FY20. Household savings rate fell in tandem to just 18.2% in FY19 and is seen to be around 17% at present. The precipitous fall in savings rate has got reflected on investment rate, which fell from 39% in FY12 to the current level of around 30%.
Removal of tax exemptions is slated to hurt insurance companies the most, as over 45% of their new business is driven by tax breaks. Mutual fund players too are worried as they fear that long-term flows that come to them through the equity linked savings schemes (ELSS) would be impacted.
Revenue secretary Ajay Bhushan Pandey said, “The minister has made a beginning here by giving an option to taxpayers to (choose a regime sans exemptions). Most taxpayers, almost 80% of them, will find this new regime more attractive.”
Sitharaman also said the government was working on the contentious Financial Resolution and Deposit Insurance (FRDI) Bill, but added she was not sure of the time-line to table it in Parliament. The Bill, which was introduced in 2018 before being withdrawn, had a “bail-in” clause that suggested in case of insolvency in a bank, depositors would have to bear a part of the cost of the resolution by a corresponding reduction in their claims. It caused a huge political furore. Even unions representing public-sector banks and insurance companies opposed the Bill, saying it proposed to empower authorities with sweeping powers to wind up PSBs and insurers.
The minister welcomed the measures announced by the RBI in the latest monetary policy review to boost the supply of liquidity for MSMEs and realty players. On the Centre’s revised fiscal path charted in the Budget, the minister said, “Based on the experiences that we had in the last round of government trying to provide stimulus, we’ve essentially made sure that we are doing it in a very discreet and considered manner.”
Sitharaman said, “We kept the macroeconomic fundamentals in mind and made sure that the necessary stimulus which was the demand of the time, both for increasing consumption and also for ensuring investments in long-term asset building, (has been provided in a prudent manner).”
Market participants shared their other pain points with the minister in a no-holds-barred conversation, where she asked them for inputs and suggestions if they were “not happy”. Be it alleged higher tax liabilities for HNIs and promoters in the new dividend taxation regime to why she did not remove the long-term capital gains tax on listed equities, the FM paid heed to market participants’ concerns, but refrained from making any commitments.
On LTCG, the minister said the government had not had enough time to assess the impact of the tax re-introduced in budget FY19. She said, “Have I had a reasonable chance to assess what I would get out of long term capital gains tax as it stands now? I have not even had a reasonable time.”
