Bank deposits are already considered to be safer, which gives them a significant advantage over other competing products.
In India, the process of creating a budget typically involves consultation with various stakeholders, as the government engages in detailed discussions prior to finalizing proposals. Following the announcement of the budget, officials from the finance ministry also listen to feedback from those affected and consider making adjustments before the Finance Bill is passed by Parliament.
Unfortunately, this time-honored tradition was not upheld during the creation of the Finance Bill for 2023-24, as approximately 60 amendments were voted on without any discussion due to a parliamentary logjam. This is certainly not an ideal practice for any democracy.
One of the key changes outlined in the Finance Bill pertains to the tax treatment of debt mutual fund (MF) schemes with less than 35% equity shares, effective from April. Under the new rules, these schemes will no longer be eligible for indexation benefits and will be subject to marginal tax rates for all tenures.
This change, along with other proposals in the Budget concerning life insurance savings products, will eliminate tax arbitrage for debt instruments, including bank deposits and life insurance savings products.
The government’s objective is to create a level playing field for these instruments. However, it is worth noting that bank deposits already enjoy a significant advantage over other competing products due to their perceived safety, particularly those held in public sector banks.
Despite offering lower interest rates, bank deposits account for approximately 60% of the total financial savings of households. As of now, bank deposits amount to Rs 180 trillion, while the assets under management of non-liquid debt schemes stand at Rs 8 trillion.
The impact on the mutual fund (MF) industry is not likely to be significant as such investment schemes constitute less than 20% of the assets under management (AUM) and contribute approximately 11-14% of the revenues. However, due to the limited availability of corporate bonds in the market, debt schemes have been a significant source of borrowing for firms.
Moreover, non-banking financial companies (NBFCs) have also been tapping into mutual funds for funds, albeit not to the extent they did before the NBFC crisis in mid-2018. If the AUMs of debt funds decrease, firms may have access to a smaller pool of funds. Nevertheless, insurance companies may step in to invest in company bonds as they are expected to benefit from the tax changes in MF debt schemes.
The withholding tax rate for royalties paid by Indian companies to foreign entities has been increased to 20% from the previous rate of 10%. It is worth noting that this tax rate was previously set at 30% before being lowered to 20% and then to 10%. The reduction to 10% was based on the rate specified in most tax treaties.
However, with the recent increase, the cost of the tax will be higher, and the receiving entity is likely to pass on the tax burden to the payer. Additionally, there will be an increase in paperwork as companies turn to tax treaties to seek relief from the higher tax rate.
The government has increased the Securities Transaction Tax (STT) on options sales from 0.05% to 0.0625%. Although this hike is not expected to cause significant effects, it could generate additional revenue for the government. In the previous fiscal year, STT collections amounted to a substantial Rs 30,211 crore, and as of January this fiscal year, collections have been strong at Rs 26,251 crore. With the economy anticipated to slow down next year, the government will require additional revenue to finance its expenditure, particularly on capital expenditures.