Changes to tax rules mean companies in India will have to diversify their investments or risk diminishing returns, according to industry commentators.
Announced on Thursday, the country’s new budget proposals saw capital gains tax double from 10% to 20% and debt mutual funds lose their tax advantage. At present, private companies contribute around 75% of the assets in liquid funds and 50% of the money in mutual funds, but with the new systems offering a less attractive proposition to short term investors, it is thought that firms may now seek to invest elsewhere.
At present, corporations like Tata Consultancy Services make a significant proportion of their profits through treasury operations, including income generated by investing surplus cash in bonds, mutual funds and other money market instruments. In order to continue their rates of return, companies are now being advised to diversify portfolios by including options such as bank deposits, high-yield gilts and government bonds, and money market instruments. Fixed-maturity Plans (FMPs) are likely to suffer the most.
“To a large extent, the tax arbitrage has come down between debt mutual funds and bank deposits. The most affected scheme will be FMPs,” said V Ravi, Chief Financial Officer at Mahindra Finance. “Over a period, liquid funds should not be that much impacted due to its ‘any time’ exit facility. But corporates will now look at very short-term bank deposits, money market funds and to some extent gilt funds.”
Adesh Gupta, Director and Chief Financial Officer of Grasim Industries, agrees. “Corporates will now have to do active treasury management as they may prefer to do direct investments in debt instruments,” he said. “Predictable investment surplus beyond one year is not available with corporates. Therefore, they may not prefer investments in mutual funds merely for tax advantage.”
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