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.
 

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vswaminathan13@yahoo.com Mar 05, 2013 Reg. Proposed section 194 IA The impression given elsewhere on this website is that the provision will, if enacted, will serve the purpose of curbing evasion of tax on transactions in immovable properties of specified kind. Going by the wisdom gathered in hindsight, the men in governance / policymakers seem to believe that what could not be accomplished so far through the other measures such as PAN, FIR , or the like could be achieved by mandating TDS. Varying views have been aired from several quarters for or against the said proposal. Be that as it should, in one have considered view, what seems to have been. By and large, over sighted are the attendant deficiencies in the proposal. If not insightfully vetted and lacunae remedied, it might result in adding to the woes of genuine taxpayers; also lead to otherwise avoidable disputes and litigation. To elaborate, in brief: The mandate to withhold tax  of 1% on certain transactions in ‘immovable property’,- earlier proposed in the last Budget but later dropped like a hot potato,- has been sought to be reintroduced; albeit with some modification(s). In one’s perspective, however, it has obviously been so done yet again, mindlessly, without the very much needed/desired home work. For an appreciation of the remark, what ought not to be over sighted is the still live/ continuing provision for tax exemption of capital gains- e.g. section 54 and 54 EC (subject to cor4rdction, if one is making a mistake in believing so). Should a taxpayer opt to, or intend opting for, such exemption, by complying with the stipulated conditions within the specified time frame, then he gets an extended time (2/3 years) for being taxed/to pay tax. The other inter-related/connected provisions, which require to have been correspondingly changed are noted to have been left untouched, To be focused on is, besides the saving section 197, section 199 , (rwr 37BA there under). If one were to go by the latest public announcement, the DTC Bill has the prospects of being introduced in the Parliament for enactment before long. According to the last seen text of the Bill, the above referred present scheme of tax exemption is slated to undergo a significant change. For deliberation on the subject TDS, one might have to wait to know how it is going to be covered in the ‘simplified code’. In case the points made are found to be valid, not without substance, it will please be appreciated that they deserve, hence require be looking into and suitably taking care.   Over to tax experts at large for sharing their thoughts; and if so satisfied, take up with the Finance and Law Ministries  seeking to set things right.

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