Budget 2013: Perfect pitch for helicopter shots

Over the past few years, the financial services sector in India has been reeling under the after-effects of the global financial crisis, and slowing growth rate. For some, these challenges have been precipitated by tax and regulatory issues.

In cricketing parlance, the “run rate” has lagged and the “asking rate” has spiralled. From the Government’s perspective, the “slog overs” are on, and it is time for a few lusty “helicopter shots” (in true M.S. Dhoni style).

Mutual Funds

The assets under management (or AUM) of the mutual funds industry in January 2008 was approximately Rs 5.48 lakh crore; by December 2012, it increased to Rs 7.86 lakh crore. The growth rates can be more impressive if certain tax measures are introduced.

For sustainable growth, the industry needs periodic inflows, and funds for deployment over the long term. Historically, tax incentives have played a critical role in garnering such funds from investors. The National Pension Scheme offers a relative advantage, where contributions by employers up to 10 per cent of employee salaries are not taxable in the hands of the employee and, at the same time, deductible in the employer’s hands. Mutual funds should be allowed to launch schemes where the tax treatment is aligned to the National Pension Scheme.

Domestic fund managers should be encouraged to manage offshore funds, as this can have a multiplier effect on the industry. This calls for trading safe harbour rules, similar to those in the UK.

Securitisation is an important element of debt markets, and mutual funds are key constituents when they invest in the Pass Through Certificates (PTCs) issued by securitisation trusts. Broadly, income earned by mutual funds is exempt, with tax incidence at the time of distribution of returns or sale of units by the investors, as the case may be. The revenue authorities have sought to tax income earned by mutual funds that are beneficiaries in securitisation trust structures, leading to their exit from the securitisation market. To revive participation, it is important to clarify the tax treatment — for which Budget 2013 could be the perfect platform.

Offshore investors

For any investor, the critical issues include likely tax on exit and its certainty. The Finance Minister can allay concerns by ensuring that

GAAR guidelines clearly enumerate the applicability to offshore funds;

there is no ambiguity on the applicability of the concessional tax rate of 10 per cent on sale of unlisted securities by non-residents to private companies;

the income of financial institutional investors (FIIs) should be characterised as capital gains (as provided under the Direct Taxes Code) and extended to other offshore investors — private equity (PE) and qualified foreign investors (QFIs);

the offshore transfer provisions ( à la Vodafone) exclude offshore investors, whether FIIs or PE;

the tax treatment of QFIs is aligned to what is applicable to FIIs, and procedural requirements are eased for QFIs (such as filing tax returns in certain situations).

K. Venkatachalam is Executive Director - Tax and Regulatory Services, PwC

Shahid Khoja, Manager, contributed to the article.

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