Budget 2013: Financial sector expected more from it
The Finance Minister today presented the Finance Bill, 2013 before the Parliament. The proposals of the Finance Minister for the financial services sector and capital markets include constitution of a Standing Council of Experts as a recommendatory body to analyse the international competitiveness of the Indian financial sector, transaction costs of doing business in India, permitting banks to act as insurance brokers, simplification of procedures for portfolio investment.
On the tax front, there are several proposals that impact the sector. One of the proposals seeks to extend a tax pass-through-treatment for SEBI registered Category I Alternative Investment Funds (under the venture capital fund sub-category) subject to satisfying prescribed conditions. The sector would have cheered had a similar treatment been extended for all AIFs.
The recent tax controversy involving securitization trusts has sought to be addressed by the introduction of a specific code for taxation of such vehicles. The tax proposal seeks to impose a distribution tax on any amount distributed by the securitization trust (except where the beneficiary is tax exempt). From an investor standpoint, especially for financial institutions, the exempt income realized from a securitization trust could give rise to disallowance of expenses under section 14A of the tax law.
The introduction of Commodity Transaction Tax (CTT) on commodity derivatives in respect of non agricultural commodities while providing a deduction of CTT as a business expense is a setback for the traders on the commodity exchanges. On the other hand, the reductions in Securities Transaction Tax for transactions in mutual funds and equity futures should encourage investments in those securities.
The parity treatment for the 5% tax on interest paid/ income distributions by Infrastructure Debt Funds setup as non-banking financial companies and mutual funds, respectively is a welcome move and should encourage foreign capital raising for the infrastructure sector.
The proposal to align the distribution tax on income distributions by mutual fund schemes (other than equity oriented funds) at 25% in the case of individual/ HUF beneficiaries could in certain circumstances trigger a shift of investors from income paying schemes to income accumulating schemes.
There are several demands of the sector which have not been addressed in the budget. Illustratively, the NBFC sector demand for tax withholding exemption on interest income and deduction for NPA provisions, the banking sector demand for rationalization of tax incentives for fixed deposits and clarifications in application of section 14A expenditure disallowance.
Overall, the sector would have expected more from the budget given the key role it is expected to play as India aims for high growth in the coming years.
(Views expressed here are personal)