Until 2014, fixed maturity plans were very popular, as long-term capital gains tax was applied if they were held for more than a year. This was changed to three years, creating a lot of disruption. Funds tried to beat this new ruling by rolling over schemes to beyond this duration, as the tax ruling held with retrospective effect. In 2018, equity gains came under the long-term tax ambit but grandfathering was permitted, with January 31 being considered as the date of acquisition for all investments made earlier. While this was irksome, existing holdings were protected. In 2020, the Budget dealt a blow to all plans for future income in the form of dividend, which became taxable in the hands of the recipient. Needless to say, companies never increased the dividend to compensate shareholders. In 2023, the indexation benefit on debt mutual funds was withdrawn and all long-term gains made would be added to the income and taxed appropriately. In 2024, this benefit was removed for property, but restored subsequently. Meanwhile, there was a new tax scheme open to individuals, which was devoid of any exemptions but had lower rates. Interestingly, this new system converges into the old one once the income nears the `20 lakh per annum mark. Therefore, the discussion on which scheme is better holds only for those whose income falls below this threshold. Clearly, planning for the future has gotten chaotic, especially if one is doing so for retirement. Also, while evaluating any tax regime, its “direction” and “certainty” are important. What is one to make from these changing tax laws which makes planning income, tax, and future flows hazardous? If one were to draw patterns on what the system’s ideology is, the tax system wants to move to one where there are no exemptions or any deductions that individuals can make. In return, there is a case for lower tax rates over elongated income slabs. Thinking deeper, it does look like that the government would not like to distinguish between short-term and long-term income, as all earnings from any source is an “income”. It does appear that at some time, all capital gains will be added to income and taxed accordingly. Even the old tax structure could soon be withdrawn, with everyone moving to the new regime. This looks to be a major takeaway from the developments in the last 10 years or so. In fact, even past finance ministers have been eloquent in their criticism of the EEE system, where the amount invested in, say the PPF, qualifies as a tax deduction, interest earned is tax-exempt, and the final withdrawal is also exempt from any form of tax. This can also probably see the end as the 2021 Budget declared taxation of interest on provident fund earnings above a threshold mark. The rationale every time is that it is only the rich who pay tax, making it an equitable system. There are always two sides to the argument. The purpose here is not to get into semantics, as there are several countries which follow different approaches that can be quoted to justify the present transition. What is needed is a medium-term tax policy (MTTP) where the ultimate goal is clearly spelt out. There needs to be a clear road map which says, for example, that by 2030, the tax system would be of a certain type. As a corollary, the system will gravitate towards this goal over the next few years. A sunset clause needs to be announced to be fair to taxpayers. This will be helpful for individuals to take decisions on savings and investment. If it is stated upfront that ideally all gains on equities and debt will be treated as income, one can invest keeping this in mind. The same holds for pension contributions. This is necessary for not just individuals, but also the market, so that there is clarity on the tax on any earnings or gains. On the expenditure side too, similar conundrums arise. Several programmes have been launched for different purposes where the allocations are really large. As the country moves towards attaining certain fiscal goals, which can be stated either as deficit numbers or debt parameters, it is the expenditure part which gets embedded in the system as they become intractable. Besides, when there is talk of becoming a developed country, clearly, such largesse would not be justified, as they would not be required. Even today, based on the Reserve Bank of India’s KLEMS data and the household consumption surveys carried out by the National Sample Survey Office, there are strong arguments for reviewing the beneficiaries of these programmes. If the levels of poverty are down to a low single digit and myriad jobs are being created as per the Employees' Provident Fund Organisation data, there is also a justification for having a sunset clause for these programmes. This means that along with an MTTP, there should be a medium-term expenditure policy, which states clearly that there would be a glide path to reducing the allocations under these programmes. It would start with a more focused targeting of the beneficiaries and then move to the stage where the allocations are rationalised substantially. This will be useful because it is not possible to lower the free food programme to say 100 or 200 million, or do away with the PM-Kisan Scheme in one stroke. By following the glide path, there can be a smooth transition. The government has been focusing a lot on improving the ease of doing business parameter, which has helped investors a lot. But at the individual level, there also needs to be certainty provided to taxpayers, for which such medium-term frameworks will be extremely useful. The author is chief economist at Bank of Baroda. Views expressed are personal.
