The Finance Bill 2023 has created quite a furore in the markets.
Let's take a look at some of the contentious proposals:

1) Taxation on debt mutual funds: Debt mutual funds held a tax advantage over FDs if held for >3 years. They were taxed at 20% with the benefit of indexation vs FDs where interest is taxed at the marginal tax rates. This made debt mutual funds the product of choice for HNIs and corporates. The FM has removed this arbitrage in case the equity holding in the fund is <35%, i.e. all gains in debt mutual funds having at least 65% in bonds will be taxed at short-term capital gains. This is a big blow to the nascent mutual fund industry. The government, in its quest to shore up tax revenues, has broken a big source of funding for corporate and government bonds. The people impacted would be investors, mutual fund houses, corporates raising debt and government itself as it is cutting off a big source of investment in government bonds. Only banks stand to gain from this by way of more money flowing into FDs.
We at Growthvine Capital believe the Mutual fund houses would become more creative and bring in funds which invest 35-40% in equity via arbitrage route and the remaining in bonds to keep that indexation benefit. Radhika Gupta

2) Securities transaction tax (STT) on F&O trades hiked by up to 25%: The government hiked the STT on options contracts to 0.021%, from 0.017%. The STT for futures has been raised to 0.0125% from 0.01%.
Growthvine Capital's take on this is that the government wants to reign in traders who indulge in excessive F&O trading.

Let's look at the positive things coming out of the finance bill:
1) REITs taxation clarification: The government has tweaked the proposal to tax debt amortisation as income from other sources. It will now be treated as return of capital by reducing the cost of acquisition of the units, as far as the issue price of the units.
Growthvine Capital's view is that it is a very good move by the government and it should assuage REIT investors' concerns. Moreover REITs are still new in India and they should ideally not be tinkered with too much at this stage so as to make them unviable.

2) Angel tax: Though there has been no roll back of budget proposals on foreign investments, but the FM has assured that the draft rules related to valuation shall be shared with the stakeholders for their inputs in April itself, and exclusions, currently provided to domestic VC Funds etc, shall also be considered for similar overseas entities.
Growthvine Capital's take is that it is a welcome move and a step in the right direction. We hope all stakeholder concerns are addressed.

The biggest impact of finance bill would be on debt mutual funds though it remains to be seen how the mutual fund industry would respond to this amendment.

DISCLAIMER: This blog is solely for educational purposes and not to offer any investment advice. Please do your own research or consult a financial advisor before making any investment decisions.