(Originally published in MoneyControl.com)

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Every year, the country awaits the pronouncements of the finance minister in the end of February with the anxiety and expectation akin to the one felt by relatives when an NRI comes home and opens his suitcase. Typically, everybody gets something but nobody gets everything they wanted or asked for.

We do not envy the FM his job – the expectations on him in this country are next only to the expectations on the Indian cricket team’s captain (the FM has to deliver only once, the captain has to deliver throughout the year). So, we will not harangue the poor man with a long laundry list of things that he needs to bring home in his budget. Rather, we will try and represent one constituency whose needs deserve to be met most earnestly in this annual exercise – that of the small investors.

Budget and the small investor

One should admit at the outset that over the past 15 years, the small investor has been consistently treated favorably by the budgetary exercise. The thematic arch over the years, across administrations and finance ministers, has been to encourage participation in the capital markets by the individual investor. The advent of tax-sheltered equity-linked mutual funds, followed by the zero-tax regime for long-term capital gains and making dividends tax-free have had a salutary effect in the way a retail investor views and participates in the equity market in the country. It has emboldened the investor to take judicious risks, and has enabled the industry to offer great products much to the benefit of the investing community. This can be evidenced by a simple look at the equity mutual funds data over the last ten years. From December 1999, to December 2009, overall equity fund AUM has grown close to 5 times from 45 thousand crores to 215 thousand crores. The ELSS funds’ AUM has grown even more impressively – close to 9 times – from 2.6 thousand crores to 23 thousand crores.

This is obviously good for the investing community and great for the overall economy. So, from an investor’s perspective, what is required of this budget exercise is a continuation of this theme – allow, enable and empower the individual investor to participate in the equity market more.

Implications of Direct tax code

The new direct tax code (DTC) set to debut in fiscal year 2011-12, indeed looks to continue along this path – with a significant moderation of the tax rates and increase in tax slabs. Also, it seeks to increase the tax-deductible contributions to certain savings vehicles – the 80-C category – by tripling the upper limit from Rs. 1 lakh to Rs. 3 lakhs.

This year’s budget could mark an intermediate step from here to there by increasing the 80-C limit to Rs. 2 lakhs. The current 1-lakh limit has been in place for a decade now without change – through the housing price-rises causing the investor to easily cross the limit with nary a savings rupee. While the DTC will provide relief in the future, providing an intermediate relief is always a good idea.

Similarly, a move to moderate the tax rates and slabs at an intermediate level to the ones proposed by the DTC would also be a good idea. The DTC proposes a 10% rate at Rs. 10 lakh slab, 20% between 10 and 25 lakhs, and a peak rate of 30% beyond Rs. 25 lakhs. Between now and then, we could have the intermediate step of having moderated rates of exempt till Rs. 2 lakhs, 10% between 2 and 5 lakhs, 20% between 5 and 15 lakhs, and 30 % beyond. This will both phase in the impact of the DTC change while giving more money in the pocket today for the tax-paying citizen.

While we are on the DTC and budget, it would go a long way to help investors plan for the future if certain aspects of the DTC are clarified for the benefit of the public. What will be the instruments eligible for participation in the 80-C investments? What is the status of tax-exemptedness of withdrawals from these tax-sheltered investments? Are there age-related, or amount-related exemptions to the withdrawal taxation? What is the status of long-term capital gains? What would be the status of past investments? What is the overall status of the discussions on DTC?

Answers to these questions would go a long way assuaging the concerns of planners and investors, and would ensure that the upcoming year is not a long wait-and-watch year when all financial planning is put on hold for the lack of clarity.

And finally, while we are at the wishing well throwing coins, we might as well toss out a couple more – one from the financial services industry perspective and one from the investor’s perspective. The first is to constitute a separate regulatory or tribunal authority that will resolve disputes between various financial regulatory bodies. The recent turf war between SEBI and IRDA has serious consequences to individual investors, and it cannot be allowed to become an unstructured, protracted legal wrangle. This should be taken as an opportunity to setup a body that can play arbitrator on these bodies. The second wish, this from the investors is to streamline the Know-your-customer process across industry segments – insurance, mutual funds, stock market, and deposits. In today’s scenario, the investor is burdened with having to produce numerous passport-photos, address proofs, cancelled cheques and, maybe even a horoscope (notarized by the astrologer). A single-window KYC process would make the whole exercise meaningful,