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Money Feb 11, 2013

RGESS or regress? Tax breaks won't help equity flows

By Arjun Parthasarathy

The government is trying to push the Rajiv Gandhi Equity Savings Scheme (RGESS) by giving it extra tax sops. It is an equity scheme where an individual earning Rs 10 lakh or less per annum can save 50 percent in tax for investments up to a maximum of Rs 50,000. The government believes that retail investors will flock to the equity markets through this scheme and help improve savings rate in the financial assets.

The RGESS scheme is more regress than progress. The government by now should have realised that just giving tax sops will not attract investors to equity markets. The abject failure of mutual funds in attracting retail investors to equity markets is a clear example of retail investors' apathy towards equity.

Reuters

The government believes that retail investors will flock to the equity markets through this scheme and help improve savings rate in the financial assets. Reuters

Mutual funds' retail equity assets are just around 18-20 percent of total assets and this industry is now close to 15 years old (except the state-owned Unit Trust of India which has been in existence for more years than that). The Equity Linked Savings Scheme (ELSS) funds constitute less than 4 percent of total mutual fund assets.

The fact that long-term gains in equity do not attract any tax is enough of a tax incentive for investors to invest in equities. The RGESS is just one more scheme that offers tax sops to incentivise investors to invest in equities. Investors will not bite this tax sop unless there is a definite benefit in investing in equities.

In fact, if retail investors perceive that there is a definitive advantage in investing in equities then they will flock to the market, tax sops or no tax sops. Investors do not mind paying taxes as tax is paid on gains, unfortunately retail investors are nervous on whether they will see gains at all on equities given the current state of economic affairs.

It is a wonder that anyone earning Rs 10 lakh or less will be able to save at all. Income taxes take away a minimum of 10% and a maximum of 20% of income. Consumer price inflation (CPI) running at an annual 10% ensures that income is worth less day by day. Sky high property prices and high loan costs ensure that if anybody has purchased property will have to spend more than half of his or her lifetime paying off property loans.

Topping it all is rising cost of education, power and transport (all of which is not captured fully in the CPI). The cost of petty corruption that is pretty large is not all captured in the CPI.

Health care costs are a big concern for the public as they have to care not only for their own health but also for the heath of their children and their elderly parents. One health set back is enough to wipe out lifetime savings.

The government should, instead of the 'regress' scheme, have a 'progress' scheme where the incentive to invest in equities come from the attractiveness of the markets due to good economic policies of the government.

The government should tell investors that it would frame policies that will help retail investors have more money to invest in equity markets. Such policies would mean reducing inflation, improving infrastructure, lowering wastage of scarce resources through subsidies, curbing real estate speculation, keeping down cost of education and improving healthcare benefits.

The government is really wasting its time on the RGESS. The time spent of RGESS could well go into better governance and that will automatically create the right atmosphere for equity investments. There is nothing that attracts investors more than the expectations of strong returns in a transparent asset class that is equities.

It is high time that the government stops all sorts of tax schemes for investments and instead just focus on the right policies for growth. Investments will happen automatically on the back of the latter.

Arjun Parthasarathy is the Editor of www.investorsareidiots.com a web site for investors.

by Arjun Parthasarathy

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