There are indications that this EET method may be employed for future tax saving instruments. As of now, however, most contributions to tax savings instruments are completely exempt, both at the time of contribution and at the time of withdrawal.

If this method were adopted, then the return on many tax savings instruments would plummet. This is because the term of many existing tax savings instruments is only between three and six years. The EET method would be beneficial only if the term to maturity is longer at, say, 30 years. In that case, the returns would be attractive. If the EET were to be adopted for short-term tax savings instruments also, then it would be tantamount to a withdrawal of tax benefits. That would be the case even if the rebate were increased from 15 per cent to 30 per cent.

For instance, consider the three-year infrastructure bond, which fetches a tax rebate of 15 per cent at the time of contribution. The bond now offers a post-tax return of 10.1 per cent. If the same were brought under the EET method and offered a rebate of 30 per cent at the time of contribution, the return would plunge to 6 per cent.

Balanced reforms: That adoption of the EET method would lower returns and increase tax does not mean it lacks merit. There may indeed be several points in its favour. What is needed is the adoption of changes that offset the disadvantages to the salaried class.

For instance, the income-tax slab and tax rates may need to be rationalised. Incidentally, this is what the Kelkar Committee, too, recommended and that is why it is essential the Committee's recommendations are implemented in total.

Piece-meal adoption of the EET method alone disregarding the required changes in the income-tax slab structure will only mean an increase in tax rates. The salaried class deserves this consideration, as the rate of incidence of tax on salaried income is quite high. The highest rate of tax of 30 per cent becomes applicable even when the taxable income just crosses Rs 1,50,000.

In addition, sufficient and attractive long-term tax saving instruments need to be created. Investors are now forced to choose between government small savings schemes and insurance schemes. The cost structure of insurance schemes, however, is quite exorbitant. This effectively ensures that PPF is the only viable long-term tax saving instrument.

It would be in the interest of investors, however, if mutual funds are allowed to float long-term pension plans. It would open up a vast array of investment opportunities for the salaried class, apart from insurance schemes. Specifically, it opens up for investors the opportunity to invest sensibly in equity. The ensuing competition between insurance and mutual fund schemes would work in the investor's favour.

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page