From tax benefits on debt funds to NPS: 5 key changes in the finance bill

Lok Sabha on Friday passed the Finance Bill, 2023 with 64 official amendments, including the removal of long-term tax benefits for debt funds that have stirred concerns in the fixed-income mutual fund industry that the measure would turn away investors.

Key amendments in finance bill:

1) Debt mutual funds: The government will tax investments in debt mutual funds as short-term capital gains, according to amendments to the finance bill passed in parliament today. This could strip investors of the long-term tax benefits that made such investments popular.

Mutual funds with less than 35% invested in domestic equities are proposed to be treated as short-term and the indexation benefits that help significantly reduce tax liability available to such funds may be removed prospectively, the amendments say.

As such, the tax rate applicable would be based on the income tax slab in which the investor falls.

Currently, investors in debt funds pay income tax on capital gains according to the income tax slab for a holding period of three years. After three years these funds pay either 20% with indexation benefits or 10% without indexation.

The new tax rules would apply to investments made on or after April 1, 2023, impacting new inflows into these funds.

2) STT on futures, options contract: The government has raised the securities transaction tax or STT on futures and options contracts, among other amendments to the finance bill, passed by the lower house of parliament today. The hikes would be effective from 1 April.

The government hiked the STT on options contracts to 0.021%, from the 0.017% stated in the Finance Act (2004). The STT for futures has been raised to 0.0125% from 0.01%.

3) Credit card payments on foreign tours under LRS: Credit card payments for foreign travel will be brought under the purview of the Liberalised Remittance Scheme (LRS) of the Reserve Bank, to ensure that such expenses do not escape TCS (Tax Collection at Source).

While moving the Finance Bill 2023 in the Parliament, Union Finance Minister Nirmala Sitharaman said the Reserve Bank of India has been asked to look into ways to bring credit card payments on foreign tours under the LRS.

4) Improving NPS: The government will set up a panel to consider changes to the country's New Pension System (NPS) to be used by both the federal and all state governments, with a view to take care of the concerns of employees while maintaining fiscal prudence. The FM said that the new approach to the NPS will be designed for adoption by both central and state governments.

5) GST Appellate Tribunal: The Lok Sabha has cleared changes in the Finance Bill to pave the way for setting up of an appellate tribunal for resolution of disputes under GST. Currently, taxpayers are filing writ petitions before high courts in the absence of the appellate tribunal.

As per the amendments proposed in the Finance Bill 2023, benches of the GST Appellate Tribunal would be set up in every state while there will be a principal bench in Delhi which will hear appeals related to 'place of supply'.

Even after more than five years of implementation of the Goods and Services Tax (GST), the appellate tribunal has not been set up. As a result, unresolved legal matters under GST have accumulated.