India’s parliament approved finance bill amendments on Friday, 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.
(Bloomberg) — India’s parliament approved finance bill amendments on Friday, 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.
The amendment will see certain debt funds taxed as short-term capital gains, which would weaken the appeal of these investments in the South Asian country. The tax will be calculated based on the investors income tax rate, implying that the tax charged could go as high as 30%.
The Finance Ministry has defended the amendment, saying an arbitrage is being created where the interest income from some debt mutual funds are not getting distributed and is instead converted into long term capital gains.
“Many taxpayers are able to reduce their tax liability through this arbitrage,” the ministry said in statement. “This is sought to be addressed.”
Asset managers on Friday took to social media to express concerns that the move will hurt the nation’s $150 billion mutual fund debt market. Shares of asset managers such as Aditya Birla Sun Life AMC and HDFC AMC also declined.
“Debt mutual funds will lose that beneficial tax regime and be treated at par with fixed deposits,” said Amit Maheshwari, a partner at AKM Global. “This proposed move will hit high net worth individuals who were using this investment as tax saving instruments.”
Funds Fret Over India Tax Proposals Impacting $150 Billion Debt
The finance bill was earlier approved without discussion as lawmakers shouted slogans, including making a demand for a panel on a US short seller’s report on billionaire Gautam Adani and his companies. Adani is widely seen to be close to Prime Minister Narendra Modi.
India currently charges a flat 20% long-term capital gains tax on debt mutual fund units if they are sold after three years from the date of investments. Any sale of units before that period attracts a short-term capital gains tax.
Indian debt mutual funds had net assets under management of 12.3 trillion rupees ($150 billion) as on Feb. 28, according to industry data.
Industry experts say the move doesn’t bode well for India’s corporate bond market as debt mutual funds were big buyers of those securities.
“Mutual funds are playing a larger role in bond market development,” said A. Balasubramanian, chief executive officer at Aditya Birla Sun Life AMC. and chairman of the Association of Mutual Funds in India. “This will take a backseat if long term capital gain tax benefit is removed from debt fund schemes.”
–With assistance from Vrishti Beniwal, Abhijit Roy Chowdhury, Chiranjivi Chakraborty and Adrija Chatterjee.
(Updates throughout)
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