Sucheta Dalal :ELSS: the mess that tax officials have created
Sucheta Dalal

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ELSS: the mess that tax officials have created  

Nov 14, 2005

When you think about it, the babus at the Central Board of Direct Taxes (CBDT) almost seem to have worked hard at messing up last week’s notification on Equity Linked Savings Schemes (ELSS). In another example of apathy and disregard for taxpayers who are affected by government actions, CBDT officials appear to have woken to the need to notify schemes eligible for tax exemption under Section 80C only because the finance ministry is preparing an Action Taken Report (ATR) on the Budget proposals, to be presented to Parliament. That is probably why it was drafted and issued in a hurry.


Although the notification appears to have drastically modified the ELSS rules, the Association of Mutual Funds of India (Amfi) thinks otherwise. A leading fund manager says the government merely copy-pasted the 1992 regulations and issued these as new. Lazy officials clearly forgot that mutual funds have had a chequered existence in the past 13 years and their regulations and reporting requirements have been drastically overhauled by the capital market regulator. Consequently, a key amendment incorporated in 1998, allowing tax-saving schemes to become open-ended was simply forgotten, leading to panic and confusion among taxpayers.


Finance minister P Chidambaram’s Budget introduced Section 80C under which a clutch of investments would together be entitled to a tax deduction of Rs 1 lakh from financial year 2005-06. That was eight months back. Meanwhile, the capital market has been booming and the time for making this year’s tax-saving investments was ticking away. So three mutual funds went ahead and announced ELSS schemes, with the provision that the government notification was yet to be issued.


They now find the ELSS has turned into an unworkable 10-year close-ended fund, which would have to stop taking new subscriptions after the seventh year (due to the three year lock-in). The regulation prescribes a repurchase price, without realising that Sebi rules now mandate repurchase at the ruling Net Asset Value (NAV). All funds now announce daily NAVs and even close-ended ones announce weekly NAVs, because investors have a right to know the value of their investment. The CBDT notification, however, prescribes that the repurchase price for ELSS schemes will be announced a year after the date of allotment, on a half-yearly basis, and at least once a month after repurchase commences.


• The government appears to have done no homework on its 80C promise

• And the notification issued last week on ELSS clearly shows this

• The finance minister must ensure more responsibility among his officers


The finance minister has a penchant for introducing esoteric new taxes in each budget, but he needs to be responsible and liable to the people if regulations implementing his proposals aren’t quickly notified. Tax officials may have failed to notice the dramatic transformation of the capital market, its automation and adoption of new reporting, disclosure and governance rules. But what happened to the high-level committees created for the specific purpose of coordination and information sharing? The simple precaution of having the notification vetted by the Securities and Exchange Board of India (Sebi) could have spared a lot of confusion all around.


Sources say CBDT does, indeed, have many of its market-related tax proposals vetted by Sebi. In fact, the modalities for collecting the Securities Transaction Tax (STT) through stock exchanges was worked out in close coordination with Sebi and the bourses. That is why its implementation was smooth and glitch-free. On this occasion, there was no time for coordination, because the CBDT was in a rush to show action taken.


The absurdities in the notification were sought to be cleared on Friday, when the CBDT announced that schemes launched this fiscal will be eligible for tax benefits. But what about the structure specified in the notification? That, too, has to change. New schemes are unlikely to be launched until that is changed. Industry sources ask: “It took eight months to issue the notification, will the correction be quicker?”


In a booming capital market, when retail investors are returning to mutual funds, the fund industry may have to suffer the outcome of official indolence by not being able to collect funds under ELSS schemes for a few more months. People deeply distrust the power without accountability enjoyed by revenue collection agencies. This has now been boosted by giving bureaucrats wider discretion in deciding what constitutes fringe benefit. It is hardly a situation that encourages better tax compliance among people.


-- Sucheta Dalal