The clarification that share buybacks will attract tax only on the shareholders is clearly welcome on many counts. The controversy was whether the company carrying out buybacks will have to pay dividend tax at 10 per cent under section 115-O. This issue seems to have been set to rest. Thus, tax would only be paid by the shareholders selling the shares to the company and such tax too would be in the form of, in most cases, long-term capital gains and thus be taxed concessionally. In a way, the finance minister has also done a favour to the tax department since without such amendment, it was conceivable that neither the company nor theshareholders (to a large extent) would have paid tax! However, unduly elaborate procedures and conditions in the Companies Act and in the Sebi Buyback Regulations would undo what the finance minister has sought to do. Still, one certainly sees several companies carrying out buybacks in the ensuing years.

Exempting amalgamations and demergers from capital gains tax and also permitting carry forward of tax and unabsorbed depreciation of the seller are two major and welcome benefits. However, they may not be effective till there is a similar concession granted to stamp duty which, in states like Maharashtra, is a major deterrent. In fact, over the years, while the income tax concessions have increasingly been given to business reorganisation transactions, stamp duty has actually been increased and extended!

Tax concessions for income from units of the UTI and specified mutual funds are partly welcome. It is stated that units shall not attract any tax in the hands of the unitholders. However, the mutual fundwould pay tax at the rate of 10 per cent. Specified schemes including US64 would in fact not pay even this 10 per cent for three years. This could be very helpful to high tax payers for whom a present pre-tax yield of about 13 per cent is converted in a pre-tax of 18.57 per cent! However, note that mutual funds are mere intermediates. They invest on behalf of the investor instead of the investor investing directly. Hence, these benefits are partly illusory and in fact even the 10 per cent dividend tax paid by other schemes is an additional cost. Strictly speaking, even to put investment in mutual funds at par with other schemes, the mutual fund as well the unitholder should not be asked to pay and tax at all.

The provisions for taxing stock options and sweat equity would need far more thought. It is said that these will be taxed as income from salaries at the time of their exercise and as capital gains when they are finally sold. However, the unanswered question is, where will the employee get the money topay tax if he has exercised the option but not sold the shares since these may not be transferable for several years? To what extent would the terms for repurchase of shares be taken into account? Further, it is inappropriate to club sweat equity with stock options since sweat equity is actually issue of shares at a discount or for consideration which is not easily valued.

The levy of surcharge will cause bitterness. Far from raising the minimum tax exemption limit, tax has been increased. There is a misconception that the tax rates are low. An individual starts paying tax at a pathetically low amount of Rs 40,000 and reaches the maximum slab at Rs 150,000, the apparently low rates are neutralised.

As far as the gold deposit scheme is concerned, one would have to wait for more details to examine implications in detail. However, it seems that, without a tax amnesty, it may not be successful on at least two counts. Firstly, how many persons would like to deposit gold if they are to be questioned as to thesource? In fact, how may persons having fully accounted gold would go for such scheme? Most would have gold ornaments for functions. Secondly how many Indians would otherwise also like to part with possession of their gold. Surely, their bank lockers are safe enough!

As far as encouraging investors to come to the capital markets, tax concessions would never be sufficient incentives. Investors have shunned the capital markets not because there were high rates of tax or even because there were taxes. They are away because their principal money, whether in shares, fixed deposits or even in units of mutual funds have been wiped out. An investor, at his entry into the market, looks for safety of principal, then his return and only thereafter for savings in tax. A person who invests, say, Rs 100,000 absolutely wants this principal to remain generally safe subject, of course to business risks. Further, he would like to be assured of the earnings. Tax would only be a fraction of the total amount at stake. Hence,to encourage investors, what needs to be done is formulation of proper corporate laws and, more importantly, their effective enforcement. It is then that tax incentives would matter. In the heyday of the early nineties, even at higher tax rates, investors flocked in the stock markets. Now, even at such low tax rates, investors may not be interested.