The financial services sector accounts for roughly 14-17 per cent of the GDP. Given the same, it is seen as a key growth sector in the agenda of the Government. Every Finance Bill has bits and pieces for the financial services sector, but there has been no wholesome approach to achieve a sustainable long-term growth in such a key sector. The Finance Bill 2012 is again a mixed bag for the financial services sector.

The major thrust has been towards inclusion of small investors/rural areas into the mainstream financial markets. Some of the proposed reforms on the regulatory side include mandatory requirement for companies to issue IPOs of Rs 10 crore and above in electronic form and electronic voting facilities for top-listed companies. While such steps are laudable in their approach, it remains to be seen how this trickles down to the aam aadmi .

Fiscal incentives

Moving over to the fiscal incentives, certain direct and indirect incentives have been introduced which again indicate an inclination towards bringing small retail investors into the organised financial market.

Some of the reforms towards this end include introducing the Rajiv Gandhi Equity Savings Scheme, whereby a 50 per cent deduction is provided on investments made in equities (with a lock-in period of three years) by new retail investors.

Additional investment-linked incentives have been provided to individuals who invest the gains realised on sale of residential properties into equity shares of manufacturing entities in the SME sector subject to conditions. But, given the intent behind introducing this provision, such an incentive could have been provided sans conditions.

Corporate investors need not lose heart. Sectoral restrictions for income-tax purposes on Venture Capital Undertakings have been removed. Cascading effect of DDT in a multi-tier structure, another issue only partially resolved earlier, has been rectified with DDT credit being made available to the holding company irrespective of its status. Additionally, Securities Transaction Tax (STT) in relation to delivery based transaction of equity shares has been reduced from 0.125 per cent to 0.1 per cent.

‘Negative list' approach

On the indirect tax front, however, the most significant structural change is the ‘negative list' approach on taxing services.

A particular example of the changes proposed under the negative list approach is the manner in which service tax may look at operating lease transactions. The proposed law appears to levy service tax on ‘activities in relation to delivery of goods' on hire purchase or any system of payment by instalments, which could bring operating leases within the ambit of service tax.

So does Budget 2012 inject the necessary impetus to the financial services sector? The answer is no.

If we have conceived incentives for manufacturing in backward areas and tax concessions for SEZs ,why have we not thought of specific tax holiday for profits of any financial services entity doing business in Tier-2 or Tier-3 cities? Coupled with the increase in service tax rate from 10 per cent to 12 per cent (a 20 per cent increase!) the industry is likely to face incremental challenges.

As Ronald Reagan once eloquently said, “Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidise it.” Surprisingly, this thought may have resonance with the current status of the financial services sector.

Smaller countries such as Singapore have established a sound regulatory network to create a hub for the financial services sector. The results of such an initiative are there for all to see. It is time for Budgets to focus on sector-specific incentives and go the whole hog rather than stopping at half-hearted attempts.

(The author is Tax Partner, Ernst & Young. R Vikram Surana, Senior tax professional, Ernst & Young, also contributed to the article)

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