Directing Savings To Specific Investments Is Old-Fashioned, Says Finance Minister
“I’d like to pour my heart out...,” the Finance Minister began by saying when questioned about three specific measures in the Union Budget 2020 that didn’t go down well with capital market participants. Namely, the abolition of dividend distribution tax, the maintenance of long-term capital gains tax and an alternative personal tax regime that offers taxpayers lower rates if they give up exemptions allowed for investments in certain savings schemes as well insurance premium payments.
Nirmala Sitharaman put up a strong defence in her post-budget consultations in Mumbai, for why she did what she did on Feb. 1.
Finance Minister Debates Dividend Tax With Motilal Oswal
Motilal Oswal, chairman and managing director of the namesake financial services firm, urged the Finance Minister to reconsider the high taxes that certain individuals will now pay on dividend income.
In this budget, the government has proposed to eliminate the 20.3 percent dividend distribution tax, paid by companies before they distribute dividends. Now shareholders will pay tax on dividends received as per the tax slabs applicable to their overall income.
While this shift is beneficial to foreign shareholders and low-income domestic shareholders (those who fall in the less than 20 percent tax bracket), high net worth investors and corporate promoters will now pay much more on the dividend income, up to 43 percent. So Oswal made the case for a lower tax burden. The Finance Minister did not concede.
Why LTCG Remains – Sitharaman Explains To Hemendra Kothari
Another capital markets doyen, Hemendra Kothari, founder and chairman of DSP Investment managers, lobbied the Finance Minister for a review of the long-term capital gains tax on equity shares. Sitharaman explained why she chose to leave the tax unchanged, despite the many requests to extend the definition of ‘long term’ from one year to three years or reduce the rate.
Make Buying Mutual Funds As Easy As Buying Gold, Says Nilesh Shah
Nilesh Shah, managing director of Kotak Mahindra Asset Management Company Ltd., and chairman of the Association of Mutual Funds in India, lamented the country’s preference for gold-based savings and asked if the finance ministry could help make the purchase of mutual funds as easy as buying gold.
Don’t Underestimate The Taxpayer...
Sitharaman was also confronted with the concern that the new optional personal tax regime will discourage the nascent investment culture in India. She countered that directing investments to certain schemes or insurance products is old-fashioned. “We underestimate the taxpayer’s ability to decide (on preferred investments).”
Meanwhile, Revenue Secretary Ajay Bhushan Pandey pointed out that before proposing the new tax regime in the budget, the government had conducted a simulation on more than 5 crore tax returns of fiscal year 2018-19. They found that 69 percent of taxpayers would benefit from the new regime and hence are likely to choose it. The impact on another 11 percent was neutral. “So we expect at least 80 percent will shift.”