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Saturday, August 22, 2009

Structural Developments in India

While the financial world has been going crazy in the past couple of years, India has been taking steps further develop the country's economy.

The New Pension Scheme which was applicable to Government employees starting 2004 is now open to public. The unique feature of this scheme is it allows investment into equity indices. It also has life cycle type investing plans as the default option. (inspired by Thaler and Sunstein's Nudge - may be?). And it is open to Non-residents as well, as long as they are citizens.

The other has been the recently proposed new Tax Code with a discussion paper. The current Income Tax Act, 1961 structurally looks like the apocryphal camel creation story. It is a mish-mash of various amendments, political concessions and such. The new code de-jargonises the Act and rationalises the structure. There is also an attempt to move towards a EET (Exempt-Exempt-Taxed) concept for savings. The concept is that contributions and earnings on the contributions are exempt and the withdrawals are taxed - very similar to the Traditional IRA in the US. This has been a step-by-step progress made since 2006 and the New Pension scheme becomes part of this step. There is also an attempt to bring stability to taxation rates. According to the current practice, a tax rate has to be notified every year in the Finance Bill during the Budget Speech which become the Finance Act. The tax rates become part of the new Tax Code. Changes to rates will presumably become a legislative amendment. These are just a couple of structural changes.

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