Dear Reader: This is serious. So pay close attention. Today, we roll out our wishlist for the honourable finance minister. If you find this wishlist a little extreme, don’t worry. It is deliberately so. When it comes to getting things done, nothing works like shock therapy.
My first recommendation to the minister will be to further complicate, I mean, simplify the capital gains tax. To the existing two brackets of capital gain taxation—long-term and short-term, we need to add two more. Ultra short-term and ultra long-term.
The ultra short-term tax should be double the rate that is applied on short-term gains. If you are currently taxed at 30% on short-term gains, for ultra short-term gains the tax needs to be 60%.
If this upsets you, don’t worry. There’s something to soothe you as well. The ultra long-term gains, which should be defined as profits on holdings of longer than 10 years, should be tax-free. Yes, no tax! This should end the obsession with short-term trading, and encourage super long-term investing. Both are much needed.
The second recommendation relates to another favourite topic—futures and options (F&O) trading. Retail investors should be allowed to trade futures and options proactively. Even encouraged. Having said that, the rules should be tweaked for retail investors to make the margin requirement for them 100%.
Yes, 100% of the total value of the exposure. So effectively, the F&O market would start working like a cash market. But because it would still be headlined F&O, we think it will still draw in retail punters, many of whom we suspect have no clue of how F&O works anyway! This way, we could end up saving the most gullible investors.
The third recommendation is less extreme. Relatively speaking, of course. The finance minister should make it mandatory for investors to draw up an asset allocation plan for themselves and submit it along with their tax returns. In the plan, they should share details of where they are now, where they need to be, and how they plan to get there.
Now, don’t worry about all the manual work required to assess these submissions. Technology companies, with all their AI tools, will review documents and verify and grade them. Good asset allocators should get a tax rebate. For not-so-good asset allocators, well, maybe start with a warning and take it forward from there. This should finally ensure that asset allocation is taken seriously by all.
Fourth, it’s high time that investors are penalised for owning too many mutual fund schemes. Now, I know the blame needs to be shared with the adviser. I have already factored that in. The finance minister and her income tax team, who now know exactly what we own, should start sending out IT notices to investors who have more than a fair number of funds.
What’s fair? Well, I would start with five funds—two for equity, two for debt, and one for liquid funds. If you insist, this could be made six funds, but no more. Once a notice is served, the investor, and their adviser, will need to explain why there are so many funds in their portfolio.
Again, we will leverage AI tools to assess all returns and responses. Failure to answer satisfactorily or take corrective action should be taken as a serious breach by the IT department (but let’s not push it to a survey-level breach; just a warning for the breach).
My final suggestion has to do with financial advice given by the mahagurus—the finfluencers. Although the regulator has come up with clever ideas on how to tackle finfluencers, I think the finance minister could also play a huge role. Here’s my billion-dollar idea—impose a notional capital gain tax on all claims made by unregistered finfluencers! I bet this will singlehandedly put this menace to an end.
So this is my wishlist. And I am all set to send it to the finance minister. If you have suggestions, drop in a line at [email protected].
Rahul Goel is the former CEO of Equitymaster. You can tweet him @rahulgoel477.
You should always consult your personal investment advisor/wealth manager before making any decisions.
