Tax treatment

Major changes without debate should be avoided

On Friday, the Lok Sabha passed the Finance Bill, 2023, with no debate. This Bill included about 64 amendments. Such issues as the finance minister’s decision to constitute a committee to look into the National Pension Scheme are generally uncontroversial and will be welcomed across the political and intellectual spectrum. But others may not be as well thought out and indeed could be seen as quite controversial. Nevertheless, there was little discussion of these changes in Parliament. While the Opposition may be assigned some small share of the blame, given that it has continued to disrupt Parliament over the Adani Enterprises issue, demanding a joint parliamentary committee, the primary responsibility for the failure to ensure enough deliberation is of the government. It is deeply inappropriate for the most important Bill related to economic policy in the year to fail to be given enough attention by lawmakers.

It is particularly important to have such discussion because some of the changes made in the revised Finance Bill reveal a great degree of confusion about tax principles in the government. The removal of indexation benefits when it comes to calculating long-term capital gains of debt mutual funds is one such change. This alteration brings the tax treatment of debt mutual funds in line with the treatment of fixed deposits in commercial banks. But is such parity appropriate? After all, bank fixed deposits are insured, more carefully regulated, and safer in general than debt mutual funds. If the risk element of debt mutual funds was not a factor in determining their tax treatment, then why have those mutual funds that have a greater than 35 per cent equity component been excluded from this change?
 

The underlying principles of how wealth and investment income should be taxed need to be thrashed out, and a broader tax reform is needed to balance the concerns of equity, revenue, and incentives to invest. In general, all income should be taxed at the appropriate marginal rate, while double taxation should be avoided. Deviations from this principle should be justified only on grounds of equity or of long-term growth. From the latter perspective, it is vital that the debt market in India in fact increase in size and liquidity. This will allow for more long-term capital to be raised by companies, and reduce systemic risk, including that to the banking system. But tax measures that do not take such long-term issues into account will only hamper the maturation of India’s financial system.
 

These are some of the issues that could and should have been raised in a discussion on the Finance Bill. Certainly, it is inexplicable that such major changes in the tax system were not announced in the Budget speech or in the original draft of the Bill. That would have allowed for discussion within Parliament and outside of the implications of such far-reaching tax changes. The government should clearly explain why it failed to include these changes in the original draft of the Bill. Overall, in order to avoid such mishaps in the future, it must revisit the need for an integrated and logical direct tax code that would incorporate these principles.