The uncertainty around the tax policies seems to be still swirling in the Indian economic environment. It’s been hardly any time that the convulsions faced by the industry over GAAR have been relaxed, the Parthasarathi Shome Committee, appointed by the Finance Ministry now seems to have a relook at the General Anti-Avoidance Rules (GAAR) and other tax proposals related to foreign investments submitted some comprehensive proposals. One of the most contentious issues proposed by the Committee was the abolition of tax on short-term gains from transfer of listed securities whether treated as capital gains or business income. This would be applicable to both residents as well as non-residents.
But to compensate the Government due to absence of tax on short-term gains, the Committee has recommended a commensurate increase in Securities Transaction Tax (STT). However, there is no explicit mention in the Committee report regarding treatment of tax on gains in investments through Mutual Funds.
Thus, in the absence of any mention about the mutual fund investments, any short-term gains will continue to be subject to short-term capital gains tax (which is currently as per the marginal tax rate of the investor). Advisors of mutual funds fear that in the absence of any explicit mention about the equity mutual funds under the new rules proposed, direct investing in equities would become more beneficial to the investors rather than the equity mutual funds’ route. While units of close-ended equity schemes are compulsorily listed on the exchanges, most open-ended equity schemes are not listed on the stock exchanges and do not strictly fall under the definition of listed securities.
We are of the view that, the tax policies should be consistent across an investment avenue. Under the present structure of the proposed changes under the Shome Committee, there would be disparity amongst the close-ended equity mutual funds and open-ended equity mutual funds. It would be imprudent to give differential tax treatment to investors under mutual funds.
While investing in equity mutual funds, with an aim of adequate diversification, one should not be ignorant about the taxation aspects, as they have a direct impact on post-tax returns. Here although recommendations by the respectable committee, intend to promote long-term investing habits amongst investors, they should not make the tax regime uncomfortable for investors who invest with a short-term investment horizon, and moreover as mentioned earlier bring out disparity in tax provisions between open-ended mutual funds and close-ended mutual funds, on the grounds of they being listed and unlisted securities respectively.
Having said the above, while investing in mutual funds; we are of the view that one must have a longer investment horizon – especially in equities.