India's Economy Needs a Bold Stroke: Redesigning the Capital Gains Tax Structure for Growth
In order to rebuild growth, India's budget needs to focus on resource mobilization and allocation, and that requires a bold approach, including redesigning the capital gains tax structure and letting the rupee fall to encourage local manufacturing.
Indian EconomyCapital Gains TaxCorporation TaxResource AllocationResource MobilizationShadow Budget 2025Real EstateJul 20, 2024
First, we need to redesign the capital gains tax structure, which currently rewards speculative investment in financial and real-estate markets. We propose increasing the holding period for financial assets to 5 years and for residential properties to 7 years. Additionally, capital gains and income on debt should be treated the same way as investment in equity.
The corporation tax rate should be linked to employment, productivity, and value-creation through innovation. Low taxes for businesses that drive margins through labor or regulatory arbitrage are not the best use of public money.
We also propose increasing the revenue share of states to pre-pandemic levels, as they play a critical role in catering to education, health, housing, and sanitation programs. This would require an additional resource mobilization of Rs 60,000 crore for states and Rs 50,000 crore for the Centre.
The Shadow Budget seeks to lower tax rates for low- and middle-income households and rationalize capital gains taxation, while keeping the level of tax on personal income at about the same level as seen in the interim budget. Resource allocation should focus on investing in economic and social infrastructure projects, improving education and healthcare, and creating large-scale employment.
Any policy that inflates asset prices will only cause the bubble to be inflated beyond reason. Letting the rupee fall may upset financial markets, but it will help lower the level of low-value adding imports and encourage local manufacturing in labor-intensive sectors.
Overall, our budget must focus on rebuilding our ability to grow, rather than prioritizing fiscal consolidation or rating upgrades. We are not a major foreign currency borrower, and hence, it is not necessary to worry about rating upgrades. Fiscal consolidation can wait; growth cannot.
Frequently Asked Questions
What is the current state of the Indian economy?
The Indian economy is not sound, with household stress, MSMEs struggling, and large companies hesitant to invest due to poor domestic demand.
What is the main proposal of the Shadow Budget 2025?
The Shadow Budget 2025 proposes a long-term approach to resource allocation and mobilization, with a focus on rebuilding growth.
How can the capital gains tax structure be redesigned?
The holding period for financial assets should be increased to 5 years and for residential properties to 7 years, and capital gains and income on debt should be treated the same way as investment in equity.
Why should the corporation tax rate be linked to employment and innovation?
To encourage businesses to drive margins through innovation and job creation, rather than labor or regulatory arbitrage.
What is the impact of letting the rupee fall?
It will help lower the level of low-value adding imports and encourage local manufacturing in labor-intensive sectors.
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