 "Please don't tax arbitrage funds retrospectively")
The Budget season is upon us and with it are a lot of hopes and apprehensions. The government has been at pains to address the fear of retrospective amendments. This government had come to power promising to provide "predictability and stability" in tax treatment but in an inadvertent contrary move, had made retrospective amendments in respect of debt mutual funds, which it only partially reversed at the stage of passing the actual Finance Bill. I had written even then (Business Standard dated July 27, 2014) that tax changes can be made by giving adequate notice, instead of sudden changes.
The partial reversal was hardly supportive of "a stable and predictable tax regime", as it changed the tax treatment of past investments in debt mutual funds that had been made years before the said amendment. In the same article, I had apprehended similar "retrospective amendments" due to a possible change in view on tax treatment of arbitrage funds. Arbitrage funds are treated as equity funds, which enjoy several advantages though in essence they are a debt fund.
It is widely believed the current Budget will change its view on arbitrage funds and classify these as debt funds. Nobody can seriously challenge the logic behind treating arbitrage funds as debt funds. But the finance minister should take care to implement the decision (if at all he takes it in the first place) in a manner that does not impact the existing investments in arbitrage funds. It is normal to implement the provisions from the next financial year, April 1, 2015 in this case.
Somebody who bought an arbitrage fund in July 2014 after hearing Jaitley promising stability and predictability of the tax regime would have justifiably expected that if he redeemed these units in July 2015 (i.e. after a year), they would be exempt from capital gains tax. Now, if the FM makes any such amendment effective from April 1, 2015, the investor will have to pay full tax on the gains, as it will be treated as short-term gains from debt funds instead of the exempt long-term capital gains on equity funds that he was promised.
Such a treatment will run directly contrary to the government's professed and oft repeated objective of providing a "predictable and stable tax regime". If the change in tax treatment of arbitrage funds is made effective from March 1, 2016, it would only apply to investments made after this Budget. A little attention to detail by the minister on this point will go a long way in assuring the investing public that the government is serious about providing a stable and predictable tax regime. The FM must resist advice from bureaucrats about the revenue implications of the deferred implementation of any such move, if he has to establish credibility about a basic promise made by the government.
While nobody seriously apprehends the Budget will bring in an out-and-out retrospective amendment, here is hoping the minister is indeed listening and we will not get a retrospective amendment by the back door.
The author is director, Apnapaisa
The partial reversal was hardly supportive of "a stable and predictable tax regime", as it changed the tax treatment of past investments in debt mutual funds that had been made years before the said amendment. In the same article, I had apprehended similar "retrospective amendments" due to a possible change in view on tax treatment of arbitrage funds. Arbitrage funds are treated as equity funds, which enjoy several advantages though in essence they are a debt fund.
It is widely believed the current Budget will change its view on arbitrage funds and classify these as debt funds. Nobody can seriously challenge the logic behind treating arbitrage funds as debt funds. But the finance minister should take care to implement the decision (if at all he takes it in the first place) in a manner that does not impact the existing investments in arbitrage funds. It is normal to implement the provisions from the next financial year, April 1, 2015 in this case.
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However, if the same route is followed and arbitrage funds are treated as debt funds with effect from April 1, 2015, all investments made in arbitrage funds after April 1, 2014, till the Budget day will be at a huge disadvantage, as they will not be entitled to a tax treatment they had assumed would be available.
Somebody who bought an arbitrage fund in July 2014 after hearing Jaitley promising stability and predictability of the tax regime would have justifiably expected that if he redeemed these units in July 2015 (i.e. after a year), they would be exempt from capital gains tax. Now, if the FM makes any such amendment effective from April 1, 2015, the investor will have to pay full tax on the gains, as it will be treated as short-term gains from debt funds instead of the exempt long-term capital gains on equity funds that he was promised.
Such a treatment will run directly contrary to the government's professed and oft repeated objective of providing a "predictable and stable tax regime". If the change in tax treatment of arbitrage funds is made effective from March 1, 2016, it would only apply to investments made after this Budget. A little attention to detail by the minister on this point will go a long way in assuring the investing public that the government is serious about providing a stable and predictable tax regime. The FM must resist advice from bureaucrats about the revenue implications of the deferred implementation of any such move, if he has to establish credibility about a basic promise made by the government.
While nobody seriously apprehends the Budget will bring in an out-and-out retrospective amendment, here is hoping the minister is indeed listening and we will not get a retrospective amendment by the back door.
The author is director, Apnapaisa