Forced Stockholm Syndrome

Portfolio pe to paisa nahi bann raha, to global gyaan hi sahi.

Everyone who has traversed through the Behavioral Finance twisted forest would have come across the term ‘Stockholm Syndrome’. Just in case you were lucky enough to escape the Behavioral Finance hydra learning onslaught that happened a few years ago (think of it like the “pharma/chemical onslaught of 2020-22”, but worse because you didn’t make any returns), Stockholm syndrome is named for a bank robbery in Stockholm, Sweden, in 1973. Four people were held hostage by the robbers for six days; when they were rescued, the hostages attempted to protect the perpetrators, with whom they had an amicable relationship.

In our case, it is a forced syndrome because of the direction the Budget has gone by for investors of India (not ‘in India’, it is ‘of India’ – ergo, citizens/individuals of India). Of course, I will rate the Budget 11/10 (or we can also rate it 91/10 to make it more contemporary with cricketing terms), but let’s look at the direction of taxation travel objectively:

1. Old Tax regime vs New Tax regime: The number of papers that have been wasted, inks that have been spilt, twitter threads which spanned infinity and the number complex flowcharts drawn which would have made your computer professor proud on this regime vs regime is just incredible. The summary, ergo the direction of this regime vs regime and the prodding towards new regime is that the Govt. is essentially saying you spend the money (don’t bother with all those pesky income tax sections on saving) and we will collect taxes
2. MLDs: All the wealth firms in India have cried hoarse privately that it has resonated into a Pathaan level blockbuster of tears, but essentially, the direction is that all sorts of tax arbitrage instruments (either existing or going forward) will be rationalized to be taxed at marginal rate and will move to whatever regime will get us more taxes. This is even better because we will collect taxes deducted at source
3. TCS: No, not your good ol’ friendly neighbourhood firm Tata Consultancy Services. This is the other TCS (taxes collected at source). Previously if you wanted to expand your exposure to international markets, you could do so by paying a tax of 5% TCS for amount beyond Rs. 7 lakh and claim it back while filing for your income tax. Now, it is 20% TCS – you can still claim it back while filing for your income tax but that’s quite a massive blockade of capital impacting your IRRs (given the timing difference between TCS and eventual filing of return). The direction is, we want you to invest more and more directly in India – and if you want to invest in international markets, we will collect taxes (MFs/ETFs investing in international markets via INR exposure is still not under this ambit – in that sense, there is a tax arb – but hey, we are all Sir John Templetons here who will want to invest in international stocks directly and not those pesky MFs/ETFs). And what’s more, we will not even let you enjoy your overseas tours because we will collect taxes at TCS via this route.
4. Market buybacks vs Dividends: Dividends have already been plugged, by adding to your income and taxing at marginal rate. Unfortunately, there is not much left there. However, investors are now clamouring for market buybacks – because clearly there is a tax arb – for the same amount of money, a shareholder can make better % returns via market buyback than dividend distribution. But hey – the US of A recently enacted The Inflation Reduction Act provision levying a 1% excise tax on the market value of net corporate shares repurchased starting in 2023. Now, if there is one thing that all countries across the big table agree on, is to implement the best and leading practices of how to collect more taxes. Of course, there are 1000s of rules in India today that a corporation has to satisfy before it does a market buyback – but if this buyback due to tax arb clamor by investors becomes a trend, expect a radically new provision in the Finance Act by implementing the best practices from US of A to ensure we will collect taxes.

Now, the common theme running across – and essentially the direction of taxation travel – seems to be ‘we will collect taxes’. This is frustrating, right? But why is this a Stockholm Syndrome? Well – you might be frustrated, exasperated, defeated, infuriated, discouraged, angered – but the underlying nature of the problem is “tum kya kar sakte ho?”. The answer is broadly “ghanta, kuch nahi kar sakte” – if you run towards debt, there is TDS; if you run towards international markets, there is TCS; if you spend more, there is GST; if you spend less (and save more), there is TDS yet again; even worse, post vote to account in 2024 and come budget of 2025 (irrespective of the party), if STT increases, or LTCG increases or STCG becomes marginal rate, what can you really do other than Twitter andolan? If you andolan more, suddenly a EEE scheme will become EET and then you will have to do (andolan)-cubed in a cubicle.

So, if you can’t beat them, join…err..love them. Think of how all the taxes at every digital footprint, every digital transaction, at every digital buy/sell, at every overseas tour you take gets spent on beautiful infrastructure, roads, upliftment of the rich and downtrodden agricultural farmers and learn to love the Government for its well thought-out, comprehensive and incisive taxation regime and taxation direction of travel. If the Stockholm people fell in love with their perpetrators within just 6 days, we are here for another 60 years – we have to have our own advanced version of Stockholm Syndrome, and must love the Government for it – we are after all a ‘of the people, by the people, for the people’ proud nation.

P.S: Of course, you might think that you will shift to other countries and live a lavish life of low taxes. Unless you are from Mars, you will realize that most developed countries tax higher than here on most things. So, eventual tax% is very similar across countries.

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