Removing Indexation Benefits Of Investors Is A Serious Mistake Of The Government: Raghav Chadha

moneycontrol

25 Jul 202403:44

Summary

TLDRThe speaker passionately advocates for the restoration of indexation on long-term capital gains, arguing that its removal disincentivizes investment in India. They explain how indexation adjusts for inflation to calculate capital gains tax, using a real estate example to illustrate the significant tax implications. The speaker warns that without indexation, real estate investment will decline, leading to undervaluation of property deals and an influx of black money in the sector, urging the government to reconsider its decision.

Takeaways

📉 The speaker is advocating for the restoration of indexation on long-term capital gains to promote investment by providing incentives to investors worldwide.
🏠 The removal of indexation disincentivizes the investor class, as it increases the tax burden on investments, which is likened to putting a 'hand in the investor's pocket'.
💰 The speaker argues against the notion that indexation is akin to taxing inflation, emphasizing that it is a necessary measure to adjust for the cost of acquisition due to inflation.
📈 The example given illustrates the significant impact of indexation on the tax calculation for capital gains, showing a substantial difference in tax liabilities with and without indexation.
🏡 The example involves a property purchased in 2001 for ₹1 crore, which has appreciated to ₹4.17 crores, highlighting the tax implications of selling the property under both old and new tax systems.
📊 Under the old system with indexation, the tax liability on a sale price of ₹4.17 crores would be approximately ₹1.08 lakh, whereas under the new system without indexation, it would be around ₹39.62 lakh.
🚫 The speaker warns of three potential negative consequences if indexation is not reinstated: a decline in real estate investment, undervaluation of property deals, and a surge in black money in the real estate sector.
📉 The speaker predicts a decrease in real estate investment if indexation is not restored, as it would make it harder for people to afford their dream homes.
💔 The undervaluation of property deals could lead to a market where properties are bought and sold at circular rates without reflecting their true value.
💸 The potential influx of black money in the real estate sector is a concern raised by the speaker, suggesting that without indexation, there will be a significant increase in illicit financial activities.
🙏 The speaker makes a plea to the government not to remove indexation and expresses concern for the future of long-term capital investment if the current policy is not reversed.

Q & A

What is the main concern expressed in the script regarding the Indian real estate market?
-The script expresses concern over the removal of indexation benefits for long-term capital gains tax on real estate investments, which could disincentivize investors and negatively impact the real estate market.
What is the purpose of indexation in the context of capital gains tax in India?
-Indexation is used to adjust the cost of an asset for inflation, which helps in calculating the capital gains tax by considering the increase in the value of money over time.
Why is the speaker urging the government not to remove indexation benefits?
-The speaker is urging the government to retain indexation benefits to promote investment in the real estate sector and to prevent potential negative consequences such as a decrease in investment, undervaluation of property deals, and an increase in black money.
What is the example given in the script to illustrate the impact of removing indexation on capital gains tax?
-The example given is of a property purchased for ₹1 crore in 2001, which has appreciated to ₹4.17 crores. The impact of removing indexation is shown by comparing the tax liability under the old and new systems, highlighting a significant increase in tax without indexation.
How does the speaker describe the potential real estate market scenario without indexation?
-The speaker predicts a decrease in investment in real estate, difficulty for people to buy their dream homes, undervaluation of property deals, and a surge in black money in the real estate sector.
What is the difference in tax liability between the old and new systems as per the example given in the script?
-Under the old system with indexation, the tax liability is approximately ₹1.08 lakh, while under the new system without indexation, the tax liability increases to nearly ₹39.62 lakh, showing a significant difference.
What is the speaker's suggestion to the government regarding indexation and real estate investments?
-The speaker suggests that the government should not remove indexation benefits and should consider the long-term implications on the real estate market and the economy.
How does inflation affect the value of money according to the script?
-The script mentions that inflation erodes the value of money, which is why indexation is important in adjusting the cost of assets to reflect the increased cost of acquiring them due to inflation.
What is the speaker's view on the recent reduction of capital gains tax from 20% to 12.5%?
-The speaker seems to be critical of the reduction, using it as a point to argue that removing indexation would still impose a heavy additional tax burden on investors.
What are the three things the speaker predicts will happen in India if indexation is not reinstated?
-The speaker predicts a decrease in real estate investment, undervaluation of property deals, and a significant increase in black money in the real estate sector.
What is the speaker's final message to the audience regarding the importance of indexation for long-term capital investments?
-The speaker emphasizes the critical need for indexation in long-term capital investments to maintain a healthy real estate market and to prevent adverse economic effects.

Outlines

00:00

🏡 Impact of Indexation on Property Investments

This paragraph discusses the importance of indexation in the context of long-term capital gains tax on property investments. The speaker urges the government to not remove indexation, arguing that it incentivizes investors to make investments. The paragraph uses an example from 2001 to illustrate how indexation affects tax calculations on property sales. The speaker explains that without indexation, the tax burden on investors would be significantly higher, potentially leading to a decrease in real estate investments, undervaluation of property deals, and a surge in black money in the real estate sector.

📈 Understanding Tax Implications with and without Indexation

The speaker provides a detailed comparison of how tax is calculated with and without indexation. Using the example of a property bought in 2001 for ₹1 crore and sold today for ₹4.17 crores, the speaker shows that with indexation, the tax liability is much lower. The paragraph explains that without indexation, the cost price is not adjusted for inflation, leading to a higher capital gain and consequently higher tax. The speaker emphasizes the need for indexation to protect the interests of investors and to maintain a healthy real estate market.

Mindmap

Keywords

💡Indexation

Indexation refers to the process of adjusting the cost of an asset for inflation. In the video, the speaker argues that indexation is crucial for long-term capital investments, as it helps in calculating capital gains tax by considering the inflation-adjusted cost price. The speaker uses the example of a property bought for ₹1 crore in 2001, which has appreciated in value to ₹4.17 crores, to illustrate the impact of indexation on tax calculation.

💡Capital Gains Tax

Capital Gains Tax is the tax levied on the profit made from the sale of an asset. The video discusses the reduction of capital gains tax from 20% to 12.5% as a positive move for investors. The speaker explains how the tax is calculated with and without indexation, highlighting the significant difference in tax liability in the given property example.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, the purchasing power of currency is falling. The speaker mentions that inflation erodes the value of money and thus should be considered when calculating the cost of acquisition for assets, which is essential for indexation purposes.

💡Investment

Investment in this context refers to the act of committing money or capital to an asset with the expectation of generating income or profit. The speaker emphasizes the importance of promoting investments through incentives like indexation to attract investors globally.

💡Incentives

Incentives are rewards or benefits offered to encourage certain behaviors or actions. In the video, the speaker suggests that indexation serves as an incentive for investors to make long-term investments, as it reduces their tax burden by accounting for inflation.

💡Disincentives

Disincentives are factors that discourage a particular action or behavior. The speaker warns that removing indexation would disincentivize the investor class, making investments less attractive due to the increased tax burden.

💡Real Estate

Real estate refers to land, buildings, and other immovable property. The video discusses the potential negative impacts on the real estate sector if indexation is removed, including a decrease in investment and the possibility of undervaluation of property deals.

💡Undervaluation

Undervaluation is the act of estimating something at a lower value than it is actually worth. The speaker predicts that without indexation, property deals will be undervalued as people will resort to circle rates, which do not reflect the actual market value.

💡Black Money

Black money refers to funds that are earned, transferred, or utilized in an illegal manner, often to evade tax. The video suggests that the removal of indexation could lead to an increase in black money in the real estate sector as transactions may be manipulated to avoid higher taxes.

💡Long-Term Capital Investment

Long-term capital investment is the commitment of funds to an asset with the intention of holding it for an extended period to generate returns. The speaker argues that indexation is essential for such investments as it provides a fair assessment of gains after accounting for inflation.

💡Circle Rate

Circle rate is a pre-determined rate used by government authorities for the valuation of properties for stamp duty purposes. The speaker warns that without indexation, property transactions may be based on circle rates, leading to a lack of transparency and potential undervaluation.

Highlights

The speaker urges for the restoration of indexation on long-term capital gains tax to promote investments worldwide.

Indexation is being removed, which disincentivizes the investor class, contrary to the purpose of encouraging investments.

Removing indexation is not about imposing taxes but rather preventing investors from being penalized like in the case of panala ijar.

Inflation erodes the value of money, hence the cost of acquisition should be indexed to calculate capital gains tax.

The speaker provides an example to illustrate the impact of removing indexation on investors.

In the example, a property bought for ₹1 crore in 2001 is now worth ₹4.17 crores, demonstrating the effect of inflation on asset value.

The old system of indexation would calculate tax based on the adjusted cost price considering inflation, resulting in a lower tax liability.

The new system without indexation leads to a significantly higher tax liability on the same property sale.

The difference in tax liability between the old and new system can be as much as ₹29 lakhs additional tax for the investor.

The speaker predicts that without indexation, there will be a decline in real estate investment.

People may never be able to afford their dream homes if real estate investments decline due to the removal of indexation.

Undervaluation of property deals is expected if indexation is removed, as all transactions will happen at circle rates without reflecting the real market value.

The real estate sector may witness a surge in black money if indexation is not reinstated.

The speaker warns of three impending negative outcomes for the country if indexation is not restored: a fall in real estate investment, undervaluation of property deals, and an increase in black money.

Indexation is deemed essential for long-term capital investment and should not be removed.

The speaker makes a plea to the government not to remove indexation and predicts its negative consequences if not heeded.