It recommended, among other steps, reducing tax on debt instruments.
The survey, authored by Chief Economic Adviser V. Anantha Nageswaran, comes days ahead of the annual federal budget where tax changes are announced. The government is not bound by the survey’s recommendations.
“To finance sustained growth, India must strengthen long-term capital markets,” a coordinated agenda for which would include rationalising tax treatment of debt instruments, the survey said.
At present, debt instruments in India are taxed at the investor’s applicable tax slab, while equity instruments have short-term capital gains taxed at a flat 20% if held for less than one year and at 12.5% if held for longer. Personal income tax rates can be as high as 40%.
Lower tax rates incentivise investors towards equity investments and hurt liquidity for debt instruments.
The survey also recommended credit enhancement facilities for lower-rated borrowers that will allow borrowers to raise funds at a lower cost. It also suggested the revision of investment guidelines for long-term funds. “Such reforms would supply the scale and maturity needed for infrastructure and climate financing while lowering the economy’s cost of capital,” the survey said.
ACTIVITY-BASED REGULATION
Separately, the economic survey called for regulatory coordination in a system currently supervised by “domain specific regulators.”
To avoid regulatory arbitrage, “regulation should shift from entity-based to activity-based frameworks,” it said.
Regulatory arbitrage refers to firms using loopholes to benefit from easy regulations.