Moneycontrol Pro Panorama | If all debt income is short term, what about equity? 

The popular view is that the government wants to tax debt schemes and fixed deposits at the same rate. That logic implies that, by removing the tax arbitrage, investors can still invest in debt funds but for higher returns by taking more risk and deferred returns by staying invested longer. But the amendment is short-sighted, argues Lisa Barbora in this piece, as it brings in non-debt MF schemes such as gold and international funds also within its ambit. And it does not address the multiplicity of capital gains regimes and rates that still exist, in real estate for example.

The mutual funds industry will be hit hard by these changes and that does not bode well for AMC stocks, writes Neha Dave in her analysis of these developments. But banks will be big beneficiaries as they have been hungry for more deposits to feed growing credit demand and the boost to deposit growth should see banks stocks benefit.

While a level playing field is one aspect, another could be the government’s desire to raise tax revenues too. For instance, a taxpayer-friendly measure to level the playing field could have been to give fixed deposits the same benefit as debt funds. But that would hit revenue hard.

The budget’s direct tax proposals itself had implied tax foregone of Rs 38,000 crore, according to the finance minister’s speech. And, the current amendments include one that gives marginal relief to taxpayers earning slightly higher than Rs 7 lakh, and who avail the new tax regime. That will mean more revenue lost. What’s more, the tax incentives availed by individuals is swelling every year, with the rebate for lower income earners contributing significantly. Today’s Chart of the Day has the details of why the government may want to raise more revenue.

The big mystery is on why such a momentous change was introduced quietly in the amendments. Was it a last-minute thought? Did the government want to avoid the hectic lobbying that would have tried to roll back this change if it was introduced it in the budget? This way, the decision became law in a jiffy and changing it will not be easy. Or have recent developments in the world, banking crises and growing threat of a recession, made the government worried about revenue growth in the coming year? The amendment will increase its revenue but by how much is not known.

While we may not know the real answers, the question is what comes next. While we don’t really want to play doomsday here, it’s a bit difficult to ignore the clear direction that we are moving towards. The government’s view on financial assets appears to be different compared to its view on physical assets. Capital gains don’t accrue from any effort, is how a former finance secretary described it. Shifting capital gains on debt to short term fits with that view.

This budget year too had seen reports of changes being considered to the long term capital gains regime on equities although nothing came of it. If we are to accept that holding debt for three or more years does not qualify it for long term capital gains, then why should equity get a special treatment is a question that could gain currency. After all, LTCG on equity shares was reintroduced in Budget 2018 and the equity cult has only grown since then and the government has claimed healthy accruals from LTCG on equities.

Of course, equity investors will be shellshocked if all equity gains are taxed at 30 percent. So that may not happen immediately but gradually the government may start turning the revenue screws, with measures such as increasing the holding period or even the tax rate in coming years.

Investing insights from our research team

Nine high-dividend stocks to ride the market volatility

Ramkrishna Forgings is riding the CV upswing

What else are we reading?

The BIS’s warning about risk to financial institutions from higher interest rates were ignored

The markets do not believe the Fed

Flash PMIs show strong growth in major advanced economies, despite banking panic

The Eastern Window: China’s influence on Nepal ebbing after government change

The economic case for a right to health is a strong one

Will Rahul Gandhi become a martyr after his disqualification?

Investors should mind the difference between Accenture and Indian IT firms

Ruchir Sharma: The unstoppable rise of government rescues  (republished from the FT)

The BJP’s growth in Tamil Nadu has begun to worry the AIADMK

Pricing power of large companies: Is it an Illusion?

Failure to close the deal may be a blessing in disguise for Bisleri & Tata Consumer

Even with ChatGPT-4, there's no such thing as Artificial Intelligence. AI is a misnomer

Nuclear power is just as green as solar and wind

​Technical Picks: TTK Health, Tata Steel, Jeera, BEL, HDFC and USD-INR (These are published every trading day before markets open and can be read on the app).​

Ravi Ananthanarayanan Moneycontrol Pro