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Lok Sabha Clears Finance Bill 2023,64 Official Amendments Introduced
The Finance Minister introduced the 64 official amendments made in the finance bill. After being passed in the Lok Sabha, the bill will now be sent to the Rajya Sabha
Photo Credit : ANI
The Finance Bill 2023 was passed in the Lok Sabha on Friday, with 64 official amendments. These amendments include withdrawal of long-term tax benefits on certain categories of debt mutual funds, setting up the GST Appellate Tribunal and the governments' move to tax investments in debt mutual funds as short-term capital gains.
While announcing the bill, the Union Finance Minister Nirmala Sitharaman announced the setting up of a committee headed by the finance secretary that would take up the pension issues of the government employees.
It may be recalled that the bill was tabled in the parliament on 1 February 2023 with the Union Budget. The Finance Minister introduced the 64 official amendments made in the finance bill. After being passed in the Lok Sabha or the lower house, the bill will now be sent to the Upper House or the Rajya Sabha.
Some of the major amendments made in the Finance Bill 2023 include :
Mutual funds having less than 35 per cent AUM in domestic equity to lose indexation benefit, to be taxed as short-term capital gains.
Enhanced tax benefits to offshore banking units operating in GIFT city, offshore banking units to get 100 per cent deduction on income for 10 years.
Tax on royalty or technical fee earned by foreign (non-resident) companies hiked from 10 per cent to 20 per cent.
No change in tax on non-par savings insurance products ( Rs 5 lakh cap remains).
No change in taxation REITS/InviTs despite representation (Income from REITS to be taxed as ‘income from other sources’ and not as capital gains).
The securities transaction tax (STT) on the sale of options has been increased to Rs 2,100 on a turnover of Rs 1 crore against an earlier levy of Rs 1,700, an increase of 23.5 per cent, while on the sale of futures contracts, STT has been raised to Rs 12,500 on Rs 1 crore of turnover against Rs 10,000 earlier, indicating a 25 per cent hike.
The industry welcomed the finance bill with open arms. Punit Shah, Partner, Dhruva Advisors said, “The amendment of taxing only the upside over and above the cost of the units, where no redemption is involved, is a welcome move. However, it would have been more appropriate to tax such gain as capital gain rather than ordinary income”.
Vivek Jalan, Partner of Tax Connect Advisory, welcomed the bill. “The most welcome step is the move to amend Section 109 of The CGST Act 2017 and lay the foundation of the formation of GST Tribunals, a Long overdue measure to get justice for the GST Taxpayers across the Country. The move was stuck in a deadlock between States and Centre wherein the States required independent GSTAT at States Level and Centre was demanding a National Tribunal at the Centre with Coordinate branches.”
He further added, “An intermediate solution has been reached wherein there would be a National Bench with Coordinate Benches in States and there would be a mix of Centre and States members - both judicial and technical. However since hearing would only be done by 1-2 members, still the dynamics for dispensation of justice needs to be worked out. Nonetheless taxpayers would heave a sigh of relief as already tens of thousands of matters are lying pending appeal before the GSTAT since it has not been formed. To add salt to the injury various state SGST Departments have initiated recovery proceedings in these matters, a move completely unwarranted and unprecedented”
Sandeep Bagla, CEO Trust Mutual Funds commented, “Last 1-2 years, MF have seen outflows from debt schemes, in spite of the tax benefit. The only segment that saw inflows was the the spate of target maturity funds which were passively holding Gsecs, mimicking FDs but with tax benefits. Investors may be reluctant to redeem even after completion of 3 years now as incremental income from these investments may remain tax efficient. Few investors may remain invested wanting to defer tax as tax is payable only at redemption. Incremental inflows will come into funds who are able to manage their portfolios actively and generate inflation beating returns for investors. There is likely to be no impact in the short term but could impact the ability of mutual funds to attract debt flows in the long term.”
Srikanth Subramanian, CEO, Kotak Cherry said, "The amendment in the finance bill will have significant structural changes to the way we invest. For mutual funds to get investor interest, it’ll now have to purely be on their ability to add extra “risk adjusted returns” and not because of any tax arbitrage. The tax arbitrage that was available at an “instrument” level seems to be getting evened out across the board be it debt MF or MLD. However this will benefit the corporate bond market where there will be renewed interest from retail investors, and this will also add depth to the liquidity which again will mean better pricing for the end customer."
Vishal Goenka, Co-founder, IndiaBonds opined, “Taxation rules across bond investments should be uniform as this simplifies the choice for investors who should focus on analysing the investment itself rather than the taxation disparity. We welcome the proposed changes via the Amendments to the Finance Bill as this creates a uniform level playing field between debt mutual fund and direct bond investment. We always encourage investors to have fixed income in their portfolio for adequate diversification and the proposed changes will make direct bond investments by individuals more attractive.”
Lallit Tripathi, chairman and managing director of Vedant Asset
According to amendments that have been proposed in the finance bill, any income from mutual funds in which less than 35% of holding is in Indian equities (in other words debt mutual funds), done after 1 April 2023, will be classified as Short term capital asset irrespective of the period of holding. Effectively this means indexation benefit from debt mutual funds has been removed. Also investment in Market Linked Debentures (MLDs), post-April 01, 2023 will be short-term capital assets. With this grandfathering of earlier investments will end.
Currently, investors in debt funds pay income tax on capital gains according to their income tax slab for a holding period of three years and after that, they are taxed at the rate of 20% with indexation benefits or 10% without indexation. T
his proposed amendment is likely to give a boost to bank fixed deposits, participation in direct bonds (gsec and non-gsec) and pure equity funds. The proposal would also take away the tax advantage on such funds and plug a tax loophole used by high net-worth individuals and family offices. The impact on the mutual fund industry is slightly negative. It is estimated that non-liquid debt AUM is estimated at around Rs 8 lakh crore, which is roughly 19% of total AUMs will be impacted as the relative attractiveness due to tax arbitrage goes away. While Liquid funds which are close to Rs 6 lakh crore will not be impacted materially as they are short-term product and there is no material change in tax attractiveness.