What the finance minister giveth with one hand, he taketh with the other. One saw that modus operandi in taxes—direct tax exemptions balanced by increased coverage of excise and service tax.
It’s similar for the mutual fund (MF) industry, although, strictly speaking, this balancing may not have been the minister’s intentions in the first place.
There is this seemingly positive move of permitting foreigners to invest in local MFs. Still, that is somewhere in the hazy future.
Fund sellers can’t board an overnight plane to Europe or the US and pitch products. They have to figure out costs, jurisdictional and regulatory issues, how to market, and more importantly, to gain the trust of overseas investors. All this at a time when investors are shying away from internal-consumption-dependent markets such as India that are battling inflation.
Be that as it may, that proposal is the good part. The bad news is that the budget has proposed to bring debt funds sold to corporate buyers under the coverage of dividend distribution tax. Earlier, dividends from liquid funds were taxed at 25% and provided an arbitrage with bank deposits, gains from which were taxed at the corporate tax rate of 30% (before surcharges).
Not only has that arbitrage been eliminated, the budget has extended this tax to all debt fund dividends. Assets worth Rs4.77 trillion are managed in this segment. However, corporate buyers account for 60%, or Rs2.86 trillion, of debt assets.
Sure, many of the assets managed under the debt category are long-term (over one year) products, which would be levied the capital gains tax of 10%. However, a good Rs1.62 trillion is under liquid or money market funds, a favourite short-term parking lot for surplus cash with firms.
With the arbitrage gone, deposit rates rising and the Reserve Bank of India proposing to deregulate savings banks interest, MFs will have to come up with newer ways to sell these products. They have three months for doing so.
Thus, on balance, the budget is negative for MFs in the medium term.
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