Trust in financial system will rise if promises are implemented well

The first reaction after digesting the Finance Bill was one of relief. No fresh tax has been proposed. Most of us had braced for a large dose of taxation, given the pandemic-fuelled fiscal constraints the government faces.

The most significant announcements, from an investor’s perspective, were not in the Finance Bill but in the Finance Minister’s (FM) speech. She announced that the government would introduce an investor charter as a right for financial investors “across all financial products”. If implemented properly and with appropriate enforcement mechanisms, this single step could change the way retail investors interact with financial products in India.

The speech had several more such gems that await appropriate implementation. Whether it is standardisation and financialisation of gold investment, which should be aided by the Securities and Exchange Board of India (Sebi) being notified the regulator, consolidation of securities market regulations, creation of an institutional market maker for investment-grade corporate bonds, the proposed increase in foreign direct investment (FDI) limit for insurance companies, the controversial proposal for a bad bank to manage the stressed assets of public sector banks, making sure that the Deposit Insurance and Credit Guarantee Corporation (DICGC) makes pay-outs of insured bank fixed deposits in a time bound manner, and many more such proposals — all these are steps that will, if implemented well, change India’s investment landscape. But we have heard such promises before and there is natural cynicism on whether the status quo will change, and within what timeframe.

The most notable change from an individual personal income tax point of view is the restriction of exemption on ULIPS up to premium payment of ~2,50,000 per year. The implementation of the proposal is fraught with issues. Perhaps that is the reason why the Central Board of Direct Taxes (CBDT) has been authorised to issue guidelines to resolve these issues, which shall be binding not only on the tax department but also, in an unusual move, on taxpayers.

The life insurance industry was granted tax exempt status since it was traditionally hard to sell pure life insurance products. But the industry has used the taxexempt status to primarily hard-sell investment products, with a pinch of life insurance thrown in to make sure the tax exemption could be claimed. Over the past three years, tax exemption for life insurance products has been pushed even harder after long-term capital gains tax was reintroduced on equity investments.

The writing is on the wall: the next investment product to lose the unwarranted tax exemption will be traditional life insurance products.

The other notable change that affects individual taxation is that interest exemption on Employee’s Provident Fund (EPF) contribution will now be limited to contribution of up to ~2,50,000 per annum. The Employees' Provident Fund Organisation (EPFO) will need to allow employees to reduce their contribution, if they are affected by this provision. Recognising the reverse brain drain that is occurring, the Income-tax Act will be amended to allow taxation of specified foreign retirement accounts on withdrawal basis, rather than on accrual. This is an excellent step that will reduce double taxation of the same income.

The biggest change in income tax is procedural—the way the assessment, re-assessment and appellate process will be done in a faceless manner. Reports of tax courts in other countries holding remote proceedings during the pandemic can be found on the internet. But no other country has gone in for a comprehensive switch to a faceless assessment and appellate process, as proposed in India.

India will be the pioneer in this area and the world will be watching us. The intention is good but there is justifiable cynicism about the human resources tasked to carry out this unprecedented task. Now that the commitment for this is to be enshrined in the Income-tax law, one hopes and prays this works well.

THE WRITING IS ON THE WALL. THE NEXT INVESTMENT PRODUCT TO LOSE THE UNWARRANTED TAX EXEMPTION WILL IN ALL LIKELIHOOD BE TRADITIONAL LIFE INSURANCE PRODUCTS