Tuesday, February 6, 2018

A letter to the Finance Minister


Dear Sir,
In your budget speech, when you introduced tax on long term capital gains from equity and equity mutual funds, you also introduced tax on dividends from equity mutual funds to bring parity between growth plans and dividend reinvestment plans. That was great thinking on the part of you and your team.  The tax law should not provide undue advantage to any section due to tax arbitrage, unless there is a social agenda like promotion of a backward area, or supporting an employment generating industry, etc. Tax incentives can also be used to promote a certain good behavior, e.g. saving for retirement or buying health insurance, or investing in one’s own house, etc.
Removal of disparity should be part of the strategy. However, there is a possibility of missing out on some disparities, which should be brought to the notice of the competent authorities. This is a humble attempt at that:
1.     Disparities within the Income Tax Act:
a.     While the budget introduced long term capital gains tax on equity shares and equity mutual funds, Unit-Linked Insurance Plans still remain outside the ambit of the same. There is a need to restore parity here. In the absence of that, there is a possibility of investors getting wrong investment products
b.     All investment advisors and academicians understand that diversification is a good investment strategy. The income tax act needs to be amended to nudge investors towards diversification. One area that stands out is the bonds v/s bond funds. Capital gains arising out of investing in bond funds (or debt funds, essentially non-equity oriented funds) would be considered long term if the investment has completed three years. On the other hand, if one sells individual bonds or debentures on stock exchanges, the gains are long term on completion of one year. This actually means that a concentrated investment receives better tax treatment as compared to a diversified portfolio. This disparity may be removed through appropriate changes.
c.      The withdrawals from NPS are taxed, but those from pension some other products are tax exempt, e.g. Public Provident Fund or pension plans launched by insurance companies
d.     Let us look at some examples to see how the tax laws are applicable to Long Term Capital Gains:
Investment
Minimum holding period
Tax rate
Indexation benefit
Tax saving through investment in capital gains bonds
Equity shares and equity mutual funds
One year
10%
Not available
Not Available
Unit linked insurance plans
One year (though, there could be longer lock-in periods)
Nil
Not Applicable
Not Available
Debt funds
Three years
20%
Yes
Not available
Listed Debentures
One year
20%
Yes
Not available
Real estate (land or buildings)
Three years
20%
Yes
Available
Other assets like jewelry, gold bars, coins, etc.
Three years
20%
Yes
Not available
Additionally, equity shares and equity mutual funds also attract STT, which is not applicable for the other avenues.
There are too many disparities in case of only capital gains. The purpose behind such disparities does not seem to be clear.
2.     While the following are not about income tax, but these come within the purview of the Ministry of Finance:
a.     The sales and marketing guidelines or the advertising code applicable to mutual funds is extremely stringent, but the same for investment-linked insurance products or the pension products is not so stringent. The law should be the same for all categories of products reaching a particular section of the investors. There should be no disparity.
                                               i.     Take for example: Mutual funds are subject to market risks v/s insurance is a subject matter of solicitation. While the former generates fear in the minds of investors, the latter makes no sense to the reader. The Unit Linked Insurance plans do not have to talk about market even if they invest in equity, but mutual funds must highlight the market risk even if the investments are in money market securities.
b.     While discounts are not allowed for mutual fund and insurance products, the same are offered when the Government of India disinvests its stake in various companies, or when the ETFs (like the CPSE ETF or the Bharat 22 ETF) are launched.
I would only think of just a few at this juncture. Can there be more? I am not sure, as I haven’t spent enough time. I propose an expert committee may be formed to study all disparities and then the same may be discussed among the various constituents including the ministry, various regulators, market intermediaries, investors, et al.
The committee’s objective should be to bring parity across all sections.

4 comments:

  1. Amitji,
    Great!
    But I am not too sure on Pension maturity and Real estate holding period.However pl check!
    1. Pension maturities (Insurance)amounts are tax free (1/3rd) and (2/3rd) are taxable or tax free if opted for annuity
    2. Real estate capital gain has been reduced to two years.

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  2. Nice Initiatives by you Amitji we all should support you for this. I will definitely send the same type of letter to FM from my end majority always count I had done this while service tax issue for smaller IFAs and that was accepted by cbdt and they had called me for any other suggestions if any. Don't understand the power of majority.

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