Change in tax rate will impact mutual fund sector: EY
Tax Leader - Financial services, EY
- The change in the tax rate to 20% and extension in period of holding to 36 months for long-term capital gains for debt mutual funds (ie other than equity oriented funds) will negatively impact the mutual fund sector as it would diminish the prevailing tax arbitrage with other debt investment avenues.
- The deeming characterisation of investment income of Foreign Portfolio Investors (FPI) as capital gains should put an end to the ongoing controversy on the matter. It may however negatively impact those FPIs who have been seeking an exemption from Indian tax on the basis that business profits (especially in the context of derivatives) are not taxable in India in the absence of a permanent establishment of the FPI in India.
- The deeming characterisation of investment income of Foreign Portfolio Investors as capital gains is likely to facilitate the onshoring of fund management activities pertaining to India which have hitherto been deterred by the risk of business income taxation of the investing fund at a higher rate of tax.
- The capital gains exemption for transfer of coupon bearing government securities outside India between non residents paves the way for listing and trading of Government securities outside India through offshore intermediaries such as Euroclear etc.
- Framework for continuous authorization of universal banks in the private sector and licensing of small banks and differentiated banks should facilitate the growth of the sector and deepen financial inclusion.
- The increase in the composite foreign investment cap in the insurance sector to 49 per cent from the current level of 26 per cent with full Indian management and control, once implemented through the enactment of the insurance law should pave way for fund raising by the capital starved sector.
- Liberalisation of the ADR/GDR regime to allow issuance of depository receipts on all securities other than equity shares should ease overseas fund raising by Indian corporates and enhance investment avenues for foreign investors.