AMC stocks tumble on tax concerns

Shares of four asset management companies (AMCs) fell by 0.55% to 4.51% as the government is likely to do away with the long-term capital gain tax benefit on debt mutual funds.

HDFC Asset Management Company (down 4.51%), Aditya Birla Sun Life AMC (down 4.15%), UTI Asset Management Company (down 4.02%) and Nippon Life India Asset Management (down 0.55%) tumbled.

In a proposed amendment to the Finance Bill, 2023, the government has reportedly proposed to tax gains arising from debt mutual funds at the investor's slab rate, irrespective of the investment period.

Currently, debt mutual funds are treated as long-term investments if held for more than three years and taxed at the rate of 20% along with indexation benefits or 10% without indexation. For those with a holding period of less than three years, they are taxed according to their tax slab.

If the proposed amendment to the Finance Bill gets cleared, investments across duration will be taxed at the investor's slab rate and there will be no indexation benefits. This is in line with the tax structure of bank fixed deposits.

With this change, there is no tax arbitrage left across debt instruments be it bank deposits, debt MFs or life insurance savings products.

The amendment has also proposed to remove long term capital gains taxation for gold ETFs and international funds, which have the same tax structure as debt schemes at present.

Radhika Gupta, managing director and chief executive officer at Edelweiss MF, tweeted: "I hope the proposed change in the Finance Bill to remove LTCG with indexation status on debt funds is reviewed. Financialization is just happening in India and a vibrant corporate bond market needs a strong debt MF ecosystem. The success of a program like Bharat Bond and target maturity funds in the last year was just the beginning of what could have been a lot of innovation in the bond category."

Meanwhile, a foreign brokerage said in a report today that the latest move is negative for MF industry having non-liquid debt AUMs of about Rs 8 lakh crore (19% of AUMs), as the relative attractiveness due to tax arbitrage goes away.

Liquid MFs of Rs 6.6 lakh crore will not be impacted materially as they are anyways a short-term product and there is no material change in tax attractiveness, it said.

Revenue contribution from non-liquid debt products is 11-14%. This is moderate to low impact as bulk of the revenue/profitability for AMCs accrues from equity AUMs and non-liquid debt AUMs are neither higher growth nor higher profitability segments, it added.

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