Debt MF taxation will take toll on corporate bond mkt
Asset managers term amendments to the Finance Bill changing tax treatment for debt mutual funds as a ‘surprise’
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Mumbai: Asset managers termed amendments to the Finance Bill changing tax treatment for debt mutual funds as a "surprise", which will be detrimental to the agenda of corporate bond market development.
Late on Thursday evening, the industry came to know about the changes the government proposed, wherein tax benefits for over three year investments in debt mutual fund investments will not be available and all such bets will attract short-term capital gains tax. The Bill was passed by the Lok Sabha on Friday.
A Balasubramanian, the Chairman of MF industry lobby grouping Amfi, who also heads Aditya Birla Sun Life AMC, called the amendments as ‘surprising’ and added that the industry will have to be ready for the changes that set in from April 1. He said that the move will be ‘detrimental’ to the broader agenda of corporate bond market development, reminding that mutual funds were big subscribers to papers issued by companies like Power Finance Corporation, Rural Electrification Corporation or Nabard.
Radhika Gupta, the vice-chairperson of Association of Mutual Funds of India (Amfi), who also heads Edelweiss AMC, called for a review of the move. "Financialisation is just happening in India and a vibrant corporate bond market needs a strong debt MF ecosystem," she tweeted. Balasubramanian explained that as lesser long-term money gets available for investments in debt mutual funds, bond issuers will have to look for alternative sources and yields they pay to secure the capital will definitely harden.
Some analysts said the amendments will make the bank fixed deposits as a favourable choice for retail investors, but Balasubramanian said the debt MF industry does not typically compete with bank fixed deposits because the debt MF industry does not get a large pool of retail money.
He said over the next week till the end of the fiscal year, there will be a higher tendency for long-term commitments to come into the debt MF space before the newer taxation regime sets in from the next fiscal year starting on April 1.
Consultancy firm Dhruva Advisors' partner Punit Shah said the amendment to treat gains on debt mutual funds as short-term gains will substantially diminish the attractiveness of such products. A MF industry participant said it is likely that the government, which had earlier proposed similar changes on investments into market-linked debentures (MLDs) in the budget presented on February 1, wanted to create a uniform playing field among all asset classes. "The rationale of treating the debt mutual funds at par with MLDs is not very clear," Shah said on Friday after the amendments impacting debt mutual funds came out.
