Mumbai: Saying that the slowdown in the economy cannot be addressed by monetary policy in isolation and also needs fiscal policy focus, a State Bank of India (SBI) economic research report on Monday called for abolition of capital gains tax.
“Abolish capital gains tax to boost financialization of savings that gained momentum in FY18, but might have lost pace in FY19," said Soumya Kanti Ghosh, group chief economic adviser, SBI, in the report cited above.
Ghosh said abolishing capital gain tax will boost households’ savings and encourage people to invest more in financial assets than physical assets.
“Past trend also suggest, financial assets have grown at a faster pace than last year and a bulk of this comes from equity. We expect this pattern to remain inclined to equities and removing long-term capital gains (LTCG) tax will again give a boost to financialization of savings," he said.
In the Union Budget for 2018-19, the government proposed reintroducing long-term capital gains tax (LTCG) after a gap of 14 years, on gains arising from transfer of listed equity shares exceeding ₹1 lakh at 10%.
“If we look at the data on asset under management (AUM) and its flows to equity segment, it suggests that post demonetisation to till the introduction of LTCG tax (prior to February 2018), the total assets grew at 36% while the flows of funds to equity grew at 68%. However, post LTCG tax, both total assets and its flow to equity segment is almost flat and the growth was less than 10%," said Ghosh.
He added that the introduction of such tax has significantly impacted the return on household financial savings and it is most likely that gross financial savings, especially shares and debentures, stagnated in 2018-19.
Other measures, to reverse the slowdown, include increasing consumption and identifying other sources of infrastructure funding. “The government must address demand weakness by continuing to meaningfully frontload expenditure say through PMKISAN and MGNREGA (PM-KISAN portal shows the number of beneficiaries is only 6.89 crore till July 2019 against the target of 14.6 crore due to slow validation in farmer data)," the report said.
For infrastructure, setting up of a development financial institution could be an effective solution, the report added.