The list of Section 80C options should have simpler products chosen for their long-term benefits The government tinkers with tax every year when it announces the Budget. One year, they announce new bonds with tax-free interest and then they stop these bonds. Another year, infrastructure bonds enjoy a tax deduction -and soon they are excluded. They offer tax-free interest in savings schemes, then withdraw them, and then bring them back again. The less we speak about ill-thought-out schemes such as the RGESS, the better. What is it that lacks in the government's policy on tax-saving investments?
First, the government must give up a rigid position on how much saving is desirable and, therefore, worthy of incentives. There is a constant clamour for raising the limit under Section 80C.
The new limit of Rs 1.5 lakh is too high for someone with an annual income of Rs 6 lakh. For someone with a Rs 60 lakh income, it is too small. The limits under this section are controlled in terms of `tax-foregone' while completely ignoring the benefits of access to long-term funds. When redefined as a percentage of income, the government actually replaces tax revenue with long-term capital for itself, and tax outgo for the investor with long-term investment for building wealth. Defining the tax-deductible savings as a percentage of the taxpayer's income would serve both purposes — adequate savings by households, and adequate capital for the government.
Bold measures that alter the direction of cash flows from annual revenue to long-term capital may work much better than fragmented thinking about revenue collection each year.
Second, the list of products that enjoy tax concessions should be simple, easy to understand, and fairly homogenous in terms of the purpose they serve for both the household and the government. There is little merit in putting 5-year bank deposits and 15-year PPFs in the same list. There is confusion in making interest taxable in some cases and tax free in others. There is needless innovation in bringing products such as RGESS that serve no useful purpose. There is irresponsibility in stipulating shorter lock-in periods for long-term investments such as Ulips and ELSS. And, there is no merit in bringing newer products like KVP (Kisan Vikas Patra) when the same post office is offering NSCs. The list under Section 80C is governed by the ill-founded idea of using tax incentives to 'direct' investments to specific products. It should instead hold a smaller range of simple products, chosen for their long-term benefit. Each one of them should enable reduction in known investment risks.
Including products that ask investors to buy liabilities or equity shares of a specific entity, even a PSU, is irresponsible.
Not stipulating performance benchmarks and allowing every PSU, mutual fund and insurer to offer products that attract tax payers' money, is equally irresponsible. A basket of debt and equity products, each one of them structured in the simplest possible way, either diversified or issued by the government, screened for performance and process, should be in the list. This will enable investors to build a portfolio that meets their requirements for returns and risks.
Third, there is no overlooking the need for promotion and distribution.
Investors are unlikely to make decisions about financial products unless they are exposed to materials that draw their attention to the merits of the product.
Such products need to be available with distributors who can help investors buy them. We have tied ourselves in knots trying to impose upon the simple feeton-street salesman the imperative to become a financial planner and advisor.
There are millions in this country, who will provide simple products to investors if all they have to do is sell. Our worries about mis-selling have completely condemned this useful link out of existence or worse, over-incentivised those who stayed. If tax saving products are promoted for their simple features and merit, and compete with one another only on the basis of their suitability to a saver, distributors will be willing to sell them for a lower incentive. We should be able to see them as we see newspaper vendors, who provide the papers of our choice at a low commission to themselves. By making the whole financial distribution piece exotic, and requiring everyone to upgrade or perish, what we have created are perverse structures that front-end commissions and pay distributors much more than the actual value they bring to the system. We also create high entry barriers were minimum gatekeeping will do.
I suggest a simple test: Find out how many taxpayers have a PPF account and ask them why they use a product that is so long term. Changes to rates or reduction and final elimination of commissions have not impacted its popularity.