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The Finance Ministry should restrict the applicability of the proposed change in tax treatment on debt-oriented mutual funds to only corporates, YM Deosthalee, Chairman & Managing Director of L&T Finance Holdings has said.
Small retail investors should be kept out of the proposed change as their participation in debt schemes are crucial for the development of the debt market in the country, he suggested to Revenue Secretary Shaktikantha Das at a CII organised post-Budget meet here.
Deosthalee also suggested that the proposed taxation treatment change should be confined to fixed maturity plans (FMPs), where corporates invest heavily to take advantage of tax arbitrage.
In his recent maiden Budget speech, Finance Minister Arun Jaitley had proposed to remove the tax arbitrage between debt-oriented mutual funds and bank deposits.
Jaitley had proposed to increase the long-term capital gains tax from 10 per cent to 20 per cent while increasing the holding period to three years to be entitled for concessional taxation.
Deosthalee pointed out that corporates could — post the Budget proposal — still enjoy the benefit of concessional tax if they were to directly invest in corporate bonds rather than through debt-oriented mutual funds.
This is because the holding period for direct investments in corporate bonds continues to be 12 months for availing concessional capital gains tax treatment.
As of today, debt-oriented mutual funds hold corporate bonds to the extent of ₹1.77 lakh crore and they participate actively in making the corporate bond market.
“If a significant portion of this is going to get diverted and size comes down, then it will certainly be going to have some impact on development of overall corporate bond market,” he said.
While the Budget proposal is to eliminate the tax arbitrage that corporates were enjoying, there were also large numbers of small retail investors participating in debt schemes, Desothalee said.
“If your idea is to really eliminate arbitrage, we can understand looking at FMPs where corporates were investing heavily. But there are several other funds where retail investors have come in. We need to ensure that retail investors participate in debt market, which needs to be developed.”
Deosthalee also made a case for keeping the applicability of the proposed change prospective — from a specified date in the future.
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