Budget 2016: Treat fixed income ETF as listed debt for purpose of taxation
If the current budget recognizes and rectifies this anomaly, it would give a huge fillip to the ETF industry, particularly the fixed income ETF
The budget reflects not just the balancing of books at individual, industry and institutional levels, but also setting the tone for expectations for the coming year. On one hand, there is a keen sense of anticipation that the budget could be a harbinger of better times to come; on the other there is this sobering thought that one will have to tighten one’s girdles now, to achieve sustainable growth in the future. At a personal level, I think this budget could be a historical landmark budget, being talked about with the same awe and reverence people do for the 1991 budget, in the future.
Couple of things which I expect from the current budget is:
A] Addition of notified securities under Sec 54EC to include mutual fund products: In the late 90s and early 2000s, there were capital gains tax benefits available under Sec 54EA and 54EB which included investments in mutual funds. This led to a sizeable amount of long term money coming into equity schemes which changed the trajectory of growth for the industry.
Currently, the benefit available is under Sec 54EC in which an investor can invest his capital gain proceeds (not exceeding Rs 50 lakh) in NHAI and REC bonds. Adding mutual fund schemes to the notified list of securities under Sec 54EC will ensure a sizeable flow of long term assets into the capital markets via the MF route.
B] Treating fixed income ETFs as listed debt for purposes of taxation: Currently, the mutual fund schemes attract short term capital gains tax (taxed at marginal rates) if the investment is for a period of less than 3 years. However, listed debt paper enjoys taxation at a flat rate of 10% if held for a period of more than one year.
ETFs, being listed debt in the purest sense of the term, currently are taxed as mutual funds rather than listed debt. If the current budget recognizes and rectifies this anomaly, it would give a huge fillip to the ETF industry, particularly the fixed income ETF.
C] Taxation of fixed income products at a retail level (less than Rs 2 lakh) to be equated with that of equity: Financial inclusion, if done through fixed income products, can encourage longevity of investments as well as get in a lot more investors. No capital gains tax after one year, STCG of 15% and no dividend distribution tax on dividends. All of this, for retail, which is defined as a sum of money less than Rs 2 lakh
D] Clarity on who pays the service tax on MF distribution: As in any other product, it has to be paid by the client. If the client wishes to NOT pay service tax on brokerage, he always has the direct plan. Clarity in this aspect will allow the industry to stay focused on it’s core job of increasing financial inclusion across the country.
I believe the budget should be a catalyst for channelizing investor interest into tangible flows, for the government.
Disclaimer: Author is the Chief Executive Officer of Edelweiss Asset Management Limited and the views expressed above are his own.