While demonetisation has made a bold start by channelizing the idle cash in the economy into the banking system, it needs to be followed through with measures to improve tax compliance and initiatives to boost the digital payment economy.
We believe it is an opportune time to boost consumption demand and business sentiment, which has shown some weakness following demonetisation. A hike in the personal tax limits can be a measure which helps towards this end. The government has rightly focused on boosting the low cost housing segment with interest subsidies and we believe that some tax exemptions on interest for home loans will provide greater thrust to this segment. This can also help in employment generation as the housing sector is one of the largest employment generators.
In the past, the Government had spoken about its intention of bringing down corporate tax rates. This year, the corporate sector is expecting some relief from the budget on this front.
From the perspective of the Mutual Fund industry we believe demonetisation will accelerate the move from physical assets to financial assets. The mutual fund industry is ideally placed to channelize the savings of retail investors into the capital markets. Over the last few years there has been a welcome increase in the participation of investors into mutual funds, especially through SIPs.
Indian retail investors have shown remarkable resilience in the last few years and have emerged as a good counter-balance to volatile FII flows into India’s capital markets. This nascent trend needs to be encouraged. We have seen good investor interest in Equity Linked Savings Schemes (ELSS), which qualify for tax benefits under Section 80 C of the Income Tax Act up to an investment limit of Rs 1.5 lakh in a financial year. However, a large number of investors are not able to take advantage of this, as ELSS competes with a number of other tax saving instruments within the 1.5 lac ceiling. Having an exclusive tax exemption for ELSS schemes will help broaden the investor base.