The Reforms and Tax debates; why it remains unsettled

The Reforms and Tax debates: Why it Remains Unsettled​

By: Amit Bhushan Date: 13th June 2016While on one hand we continue to see some government activity on the side on new investment avenues and resolve to push new ventures/projects or even technology start-ups. To spur economy, it has created new revenue generation sources like enhancing fuel tax and benefitted from falling input prices, created toll based or user charges based development models, reduced exemptions and raised surcharges (on taxes) in order that government can spend on some of its pet schemes. This is while rationalization of spends including some renaming/re-design of old schemes and projects continue alongside.
The government has been giving tax exemptions for investing in infrastructure sectors as well as in equities to public besides in generation of long terms funds via the Pension / Insurance / PF sector. It also claims to have opened up new sectors such as Waterways and Renewables Energy besides ramping up on the regulatory/environmental hurdles to buffet the ongoing projects. It has also taken tariff and possibly non-tariff measures to safeguard some of the interests on investors. On the noise side it is busy chasing black-money to be brought back so that coffers of the poor can be filled.
The government also seems to be keen for tax reforms in states so that it can create a unified market and sailing for businesses become a bit smoother. This is besides some reforms in the banking sector to make credit available and making noise about the interest rates and even working towards credit availability for small businesses. While the government side argument is huge reforms whereas opposition claims as a lack of Big-bang reforms and question the resolve.
The reforms in banking seems to have flagged of a pile of assets which had had issues and are being pushed to chopping block by companies in conjunction with banks. While the domestic equity market has seen some response via which some companies have raised public funds, but the corporate bond market is at best non-functional as they have not been able to attract public of even SME investments. While the government seems to be keen on deepening the bonds markets and further develop the equity markets, however much of India super rich have continued to show inclination for non-productive assets such as Real Estate or Gold which are also arenas which attract the biggest chunk of black money.
The other key arena for most investments are sectors where the government is a big buyer viz. defence and where certain monopolies can be ensured often under Public Private Partnership projects in ports, roadways, aero-hubs etc.While the government on its part has put in a detrimental 10% customs duty on gold or even a service tax on real estate, this hard seems to having any impact. The government on its part has removed Wealth tax on the rich which was seen as giving low revenue and a high hassle to maintain. An attempt by the government to put Sales tax levy on gold buying was rebuffed as un-implementable/unpractical by the markets.
Basically, India’s rich have shown inclination for Gold and Real Estate which is seen as safe harbour investment or areas under some political protection/privilege. The cricket related investments in teams could be seen as a shining example of innovations happening in this direction and also a measure of the extent to which investors seek such political privileges for their investments. This is all the while when the efforts on the black money side has revealed almost a zilch in comparison to the expectations. So the question is about what can be done to push demand for revenue generating assets amongst the affluent who would not buy such assets as the revenues from the same keep on fluctuating or buy them only when substantial bank credit is available so that they are taking minimum risk.
It is rather the tendency of risk avoidance amongst investors that keeps them glued to political lordships who keep tinkering with the markets through state and central policies and actually results in greater risks depending upon who got their way in such decisions. The dependence on global investors with the worries about the USD interest rates, impact of probability of a dis-integration of EU or slowdown in Brazil/Russia or spike and fall in commodities etc. would only keep markets wobbly enough for the comfort of rather risk averse domestic investors. While ensuring deepening of the Bonds and Equity markets, the leadership needs to ensure that investors participate in open debates rather than attempt to influence policy decisions behind closed doors. Such discussions will allow people to take and also to adjust positions in the markets and fend off their risks in manner as deemed suitable by them. For this the government could try tax related measures to tax holding of investors in Gold and Real Estate beyond a defined limit.
Other instruments may remain off from the perspective of this sort Wealth tax. This could be applicable for say people who hold say 500 gms of gold /bullion/gems or more than 10 acres of land or built up residential/commercial property on such an area of value upwards of 50Cr. For business dealing in gold or real estate, they should be able to show churn which means they are selling of gold and real estate within a defined period to say 1 year for gold and 3 years for land/real estate (to escape the impact of such Wealth tax). For defaulters, the onus of proof that such wealth is not ill-gotten and therefore should not be impounded by government would prove to a big deterrent while a majority will not be affected as they wouldn’t make the cut-off. For industrial users of land, they can avoid such Wealth tax if they are employing more than 25 people per acre on such land holding. Such actions could weaken the lust for these unproductive investments towards more productive choices and also force some unscrupulous practices in the real estate markets in particular.
The above proposals would unlock wealth held up in unproductive assets and bring it to equity or bond markets depending upon the risk appetite of investors. This would also force the wealthy to be more open in policy discussions in order to protect their investments since they are rather mature investors having made such wealth or could hire professionals to manage the same. This would set a precursor whereby which many sectors might eventually become relatively free of political interference as tinkering without wider consultation with market players will be politically unviable and an essential component for functioning of modern day markets. This would allow a huge domestic market for new ventures to be funded domestically and with support of knowledgeable investors and propel growth as well as deepen domestic markets reducing dependency on foreign investors. Participation of knowledgeable domestic investors in large chunks would eventually open up participation by larger masses and deepen the markets.

 

[Dhruv Bindhani]

The Reforms and Tax debates: Why it Remains Unsettled​

By: Amit Bhushan Date: 13th June 2016While on one hand we continue to see some government activity on the side on new investment avenues and resolve to push new ventures/projects or even technology start-ups. To spur economy, it has created new revenue generation sources like enhancing fuel tax and benefitted from falling input prices, created toll based or user charges based development models, reduced exemptions and raised surcharges (on taxes) in order that government can spend on some of its pet schemes. This is while rationalization of spends including some renaming/re-design of old schemes and projects continue alongside.
The government has been giving tax exemptions for investing in infrastructure sectors as well as in equities to public besides in generation of long terms funds via the Pension / Insurance / PF sector. It also claims to have opened up new sectors such as Waterways and Renewables Energy besides ramping up on the regulatory/environmental hurdles to buffet the ongoing projects. It has also taken tariff and possibly non-tariff measures to safeguard some of the interests on investors. On the noise side it is busy chasing black-money to be brought back so that coffers of the poor can be filled.
The government also seems to be keen for tax reforms in states so that it can create a unified market and sailing for businesses become a bit smoother. This is besides some reforms in the banking sector to make credit available and making noise about the interest rates and even working towards credit availability for small businesses. While the government side argument is huge reforms whereas opposition claims as a lack of Big-bang reforms and question the resolve.
The reforms in banking seems to have flagged of a pile of assets which had had issues and are being pushed to chopping block by companies in conjunction with banks. While the domestic equity market has seen some response via which some companies have raised public funds, but the corporate bond market is at best non-functional as they have not been able to attract public of even SME investments. While the government seems to be keen on deepening the bonds markets and further develop the equity markets, however much of India super rich have continued to show inclination for non-productive assets such as Real Estate or Gold which are also arenas which attract the biggest chunk of black money.
The other key arena for most investments are sectors where the government is a big buyer viz. defence and where certain monopolies can be ensured often under Public Private Partnership projects in ports, roadways, aero-hubs etc.While the government on its part has put in a detrimental 10% customs duty on gold or even a service tax on real estate, this hard seems to having any impact. The government on its part has removed Wealth tax on the rich which was seen as giving low revenue and a high hassle to maintain. An attempt by the government to put Sales tax levy on gold buying was rebuffed as un-implementable/unpractical by the markets.
Basically, India’s rich have shown inclination for Gold and Real Estate which is seen as safe harbour investment or areas under some political protection/privilege. The cricket related investments in teams could be seen as a shining example of innovations happening in this direction and also a measure of the extent to which investors seek such political privileges for their investments. This is all the while when the efforts on the black money side has revealed almost a zilch in comparison to the expectations. So the question is about what can be done to push demand for revenue generating assets amongst the affluent who would not buy such assets as the revenues from the same keep on fluctuating or buy them only when substantial bank credit is available so that they are taking minimum risk.
It is rather the tendency of risk avoidance amongst investors that keeps them glued to political lordships who keep tinkering with the markets through state and central policies and actually results in greater risks depending upon who got their way in such decisions. The dependence on global investors with the worries about the USD interest rates, impact of probability of a dis-integration of EU or slowdown in Brazil/Russia or spike and fall in commodities etc. would only keep markets wobbly enough for the comfort of rather risk averse domestic investors. While ensuring deepening of the Bonds and Equity markets, the leadership needs to ensure that investors participate in open debates rather than attempt to influence policy decisions behind closed doors. Such discussions will allow people to take and also to adjust positions in the markets and fend off their risks in manner as deemed suitable by them. For this the government could try tax related measures to tax holding of investors in Gold and Real Estate beyond a defined limit.
Other instruments may remain off from the perspective of this sort Wealth tax. This could be applicable for say people who hold say 500 gms of gold /bullion/gems or more than 10 acres of land or built up residential/commercial property on such an area of value upwards of 50Cr. For business dealing in gold or real estate, they should be able to show churn which means they are selling of gold and real estate within a defined period to say 1 year for gold and 3 years for land/real estate (to escape the impact of such Wealth tax). For defaulters, the onus of proof that such wealth is not ill-gotten and therefore should not be impounded by government would prove to a big deterrent while a majority will not be affected as they wouldn’t make the cut-off. For industrial users of land, they can avoid such Wealth tax if they are employing more than 25 people per acre on such land holding. Such actions could weaken the lust for these unproductive investments towards more productive choices and also force some unscrupulous practices in the real estate markets in particular.
The above proposals would unlock wealth held up in unproductive assets and bring it to equity or bond markets depending upon the risk appetite of investors. This would also force the wealthy to be more open in policy discussions in order to protect their investments since they are rather mature investors having made such wealth or could hire professionals to manage the same. This would set a precursor whereby which many sectors might eventually become relatively free of political interference as tinkering without wider consultation with market players will be politically unviable and an essential component for functioning of modern day markets. This would allow a huge domestic market for new ventures to be funded domestically and with support of knowledgeable investors and propel growth as well as deepen domestic markets reducing dependency on foreign investors. Participation of knowledgeable domestic investors in large chunks would eventually open up participation by larger masses and deepen the markets.

This 2016 article by Amit Bhushan delves into the persistent challenges and unresolved debates surrounding tax reforms and investment patterns in India, particularly concerning the wealthy's preference for unproductive assets.

Bhushan notes the government's efforts to stimulate the economy through new investment avenues, fuel tax hikes, user charges, and reduced tax exemptions. Despite these measures and claims of opening new sectors like waterways and renewables, a significant hurdle remains: the Indian rich's continued inclination towards "non-productive assets" like real estate and gold, which are often also avenues for black money. The article highlights that even with customs duties on gold and service tax on real estate, this trend persists, further exacerbated by the removal of the wealth tax due to its low revenue generation and high administrative cost.

The author argues that this risk-averse behavior among domestic investors, coupled with their tendency to seek political patronage, distorts market functions and makes the economy overly dependent on global investors. He advocates for tax-related measures to discourage excessive holdings in gold and real estate beyond a defined limit (e.g., 500 grams of gold, 10 acres of land, or property worth over INR 50 crore). Such a "wealth tax" (though not explicitly named as such, but a tax on holdings) would compel the wealthy to participate in open policy debates, reducing political interference and fostering a more transparent market. This, he concludes, would unlock wealth for productive investments in equity and bond markets, reducing reliance on foreign capital and deepening domestic financial markets for new ventures.