The Budget-making exercise in India is usually a consultative process, with the government engaging in extensive discussions with stakeholders before the proposals are finally firmed up. Post the announcement too, finance ministry officials hear out the views of those impacted and see if any proposal needs to be tweaked before the Finance Bill is passed by Parliament. The good tradition was discontinued this time—about 60 amendments to the Finance Bill for 2023-24 have been voted on without any discussion because of the logjam in Parliament. That’s certainly not a good practice in any democracy.
Among the key changes introduced in the Finance Bill relates to the tax treatment of debt mutual fund (MF) schemes or those where the share of equities is less than 35%. Starting April, these will no longer be eligible for indexation benefits and will be taxed at the marginal rate across tenures. This change, together with those proposed in the Budget, on life insurance savings products, leave no tax arbitrage across debt instruments, including bank deposits and life insurance savings products. That is clearly the objective of the government, which wants to put these instruments on a level playing field. While this might sound logical, the fact is that bank deposits already enjoy a big advantage over competing products in that they are perceived to be safer, especially deposits in public sector banks. That’s the reason bank deposits account for about 60% of the total financial savings of households even though they offer lower interest rates. Bank deposits today total Rs 180 trillion compared with the AUM of non-liquid debt schemes of Rs 8 trillion.
The impact on the MF industry might not be too severe since such schemes account for less than a fifth of the AUM and around 11-14% of revenues. However, given the shallow corporate bond market, debt schemes have provided firms with an avenue through which to borrow. In fact, NBFCs too have been sourcing funds from MFs, though not as much as they did prior to the NBFC crisis in mid-2018. Should the AUMs of debt funds fall, firms would have access to a smaller quantum of funds. It is, of course, possible insurance companies would step in to invest in bonds of companies as they stand to benefit from the tax changes to MF debt schemes.
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The witholding tax on royalty paid by Indian companies to foreign entities has been doubled to 20% from 10%; at one time, this used to be 30%, but was subsequently lowered to 20% and then 10%. The reason it was brought down to 10% was that this is the rate specified in most tax treaties. The higher cost apart—the receiving entity typically passes on the tax to the payer—the paperwork too would increase as companies seek refuge in treaties.
The Securities Transaction Tax (STT) on options sales has been raised to 0.0625% from 0.05%—this is unlikely to have too much of an impact and is a good way to earn incremental revenues. In FY22, the government mopped up a fairly substantial Rs 30,211 crore from STT and, until January this fiscal, the collections have been a robust Rs 26,251 crore. Given that the economy is set to slow next year, the government needs revenues to be able to spend, especially on capex.