Why the retrospective amendment, Mr FM?

About 159 FMPs were redeemed in April-May 2014. Since exact numbers were not available, assuming each scheme at Rs 50 crore and assuming all of them were for less than three years, the total figure is Rs 8,000 crore

The finance minister made many announcements in his record breaking speech (more than two-hour long) but the one that was awaited with bated breath was the NDA government's stance on retrospective amendments that affected large sums of taxes in celebrated cases such as Vodafone. The announcement when it came did not really satisfy the markets but one thing he mentioned was "that the government will not ordinarily bring about any change retrospectively which creates a fresh liability". The finance minister went on to assure the investor community at large that "we are committed to provide a stable and predictable taxation regime...".

In the same Budget speech he went on to outline changes in the taxation of capital gains on non-equity oriented mutual funds that has the impact of creating additional/fresh liabilities on transactions that have already been consummated in the past.

There was (and it continues to remain despite the amendment) a tax arbitrage opportunity as capital gains arising on transfer of debt mutual funds held for more than a year was taxed in a different manner as compared to bank FD, debentures or bonds, etc. where the interest is taxed every year. So the "concessional rate" was hiked from 10 per cent to 20 per cent but the bigger impact which creates "fresh liabilities" was increasing the period of holding from one year to three years for the purpose of reckoning whether the capital gain is long-term or not.

Here is how it works. Fixed maturity plans (FMPs) have been very popular in the past two years and most of them mature in the first quarter of the financial year to take full advantage of the existing tax laws. Now all the FMPs that have already been redeemed in the past three months and which were for a period of less than three years will be transformed into "short-term" capital gains and will therefore be taxed at regular income tax rates rather than the almost "nil" rates that they were effectively entitled to because of the indexation benefit that is available only for "long-term" capital gains.

A cursory search on the internet reveals that about 159 FMP schemes were redeemed in April-May 2014. Since exact numbers were not available assuming each scheme at Rs 50 crore and assuming all of them were for less than three years, the total figure is a not inconsiderable Rs 8,000 crore. Whilst the biggest impact was on FMPs that have already been redeemed in the last quarter, the story is similar for the redemption on any open ended debt (or for that matter gold) mutual fund. The retrospective nature of this amendment provides an excellent test case of the government's resolve to provide "a stable and predictable taxation regime". Will the government bite the bullet and agree to change the proposed amendments to make the taxation treatment apply only to assets purchased after the budget date or like previous governments it too will let the tax payers bear the brunt of this unwitting retrospective amendment to the tax laws. The tax amount at stake in this case is much lower in money terms (as compared to cases like Vodafone) but it affects a large number of investors who will take a cue from this whether the government will really walk the talk on retrospective amendments.

The writer is CEO, Apnapaisa.com