When the new government took over, it promised 'predictability and stability' in tax treatment. But in an inadvertent contrary move, it proposed to incorporate clauses that taxed already redeemed units in non-equity mutual fund (as well as non-listed equity shares) between April 1 and July 10 on a different disadvantageous basis.
According to the latest reports, it seems this anomaly has been corrected (though the fineprint needs to be seen on whether it actually has been done). In any case, these corrections are unlikely to have provided any relief to investors who had invested last year or the year before, assuming the tax treatment would continue to remain stable and predictable. However, investors now are faced with much higher taxation on investments that have been done in the past.
The need for these changes in the tax laws is ostensibly to prevent investors taking advantage of a tax arbitrage opportunity. The finance minister also mentioned that 'this arbitrage has hardly benefited retail investors…' thereby implying that it would perhaps have been fine if the tax arbitrage opportunity has been used by individuals rather than corporate investors.
These amendments bring the whole issue of stability and predictability in tax treatment into focus. Even now, after these amendments, it is not that the differential in tax treatment between investment in fixed deposit and a debt fund has vanished. It only restricts the tax arbitrage opportunity to investments longer than three years instead of those for up to one year earlier. Does this mean that we can expect more disadvantageous tax changes in the future on this issue?
This tax arbitrage arrangement is not new and has been in place since decades and had been widely commented on. You cannot fault the investors (including the somehow lesser corporate investors) from investing based on a more favourable tax treatment which had been in place for decades.
There are several other areas where such 'tax arbitrage' exists. For instance, arbitrage funds; here the fund buys equity and hedges it fully through a forward sale thereby earning an interest amount from an equity investment.
If an investor was to do this activity on his own it would be treated as a business income and be taxed at the normal rates, but when the same activity is carried out by a fund, and the investor enjoys the return, it is taxed at much lower rates including zero tax on long-term capital gains. That is, on holding the investment for a year or choosing a dividend payout option.
These arbitrage funds already have around Rs 5,000 crore of investment. They are now in the limelight, so this amount is likely to be increased manifold in the coming year and like any other debt instrument, here too the major investment is by the much maligned corporate investor.
Additionally, there are equity-oriented balanced funds that have a larger allocation to debt than 35 per cent which is the maximum debt allowed to qualify as an equity-oriented fund. The extra allocation to debt, of over 35 per cent, is made through the same buy and is a fully hedged route. Should we expect disadvantageous tax changes in the treatment of these investments in the future?
The BJP government can prove it is really serious about its promise to provide a stable and predictable tax regime if the tax department or a suitable committee pro-actively identifies all such opportunities available in the market and provides its considered views. It could lay down a threshold time limit or a threshold aggregate investment amount up to which the arrangement will remain stable.
And, after which the arrangement can be changed, with plenty of advance notice. There is no need to make these changes secretly and suddenly. This will mark a clean break from the sudden changes that have been the norm so far.
Unlike investors who can perhaps be jacketed as retail or corporate, investor confidence is a single unit that swings together. A concrete proof of stability and predictability of tax treatment will go a long way in swinging it towards positivity.
The writer is CEO, Apnapaisa
