Eleven days ago, in the Union Budget, the government announced a change in the way it levies tax on investments made in non-equity mutual funds. Not only was the tax increased, it was also made effective on a retrospective basis. Or maybe it was not, because the sentence in the budget that laid down the effective date of these changes contradicted itself.
Would the government actually impose a retroactive tax in the very budget in which Mr. Jaitley spoke against the very concept? No one was sure. It would have to wait for a clarification. The problem is that eleven days have gone by, and there’s still no clarification. Meanwhile, investors and fund managers in the largest asset class that Indian mutual funds manage (Rs 8 lakh crore, a giant sum by any standards) are waiting on tenterhooks. People don’t know whether to invest in a whole class of products, and those who have invested don’t know what the tax implication of their redemptions will be.
Of course, such issues are there in every budget. However, when the budget is presented in February, they don’t matter so much. The measures apply only on April 1and there’s plenty of time to sort out errors and contradictions. However, this time the R&D is being down on a live basis, so to speak. The budget refers to these changes being applicable for the assessment year 2015-16, which means that they are effective from April 1, 2014. If that’s the case then they are already effective on a retrospective basis. But it also says (in the same sentence) they are effective from April 1, 2015. Which is correct? No one knows. When will a clarification come? There’s no telling. How should a Rs 8 lakh crore market (which is the nearest thing that India has to the thriving bond market that Mr. Jaitley wished for in the budget) conduct itself? Perhaps no one is bothered.
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