moving towards a less taxing future
capital gains tax across asset classes has a positive effect in three areas. One, it lowers arbitrage among asset classes, such as equities, real estate and gold for household savings. Two, it addresses the differential in effective tax rates on labour and capital. And, three, it allows government tax revenue to grow without unduly affecting economic productivity. All these have long-term effects on economic growth and redistribution by influencing behavioural changes towards work, savings and risk-taking. The move also lowers the likelihood of asset price bubbles by encouraging freer capital movement. The markets have, thus, taken the changes announced in the budget in their stride, and the anticipated turbulence was weak and short-lived. Further steps to harmonise the tax treatment of capital gains are likely to be met with less anxiety by investors.
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GoI has, thus, achieved two breakthroughs with the budget announcement. There is a messaging success with the Centre signalling its intent to reduce tax arbitrage. It also addresses the chronic challenges of a complicated tax administration. The move on capital gains tax is part of a broader effort to simplify tax rules to plug revenue leakage over interpretation. The first budget of the new government has rightly taken the opportunity to lay out a course of simplification that assures taxpayers of low and stable tax rates.
Financialisation of household savings has an impact on macroeconomic stability in a resource- and energy-deficient economy such as India. Investments in physical assets like gold and
