On Friday, March 24, the Lok Sabha passed the Finance Bill 2023, part of the budget process, with some major amendments. The bill contains various proposals related to taxation and government spending and has been passed with several amendments, including the addition of 20 new sections and 64 amendments.
The Finance Minister, Nirmala Sitharaman, tabled the bill in the lower house amid sloganeering by opposition MPs demanding a Joint Parliamentary Committee inquiry into the Adani Group issue.
STT Rate Hike
The Centre has increased the securities transaction tax (STT) on selling futures and options (F&O) contracts in India’s stock and commodity market. In the Finance Bill 2023, STT on the sale of options has been hiked by 23.52% from Rs 1,700 on a turnover of Rs 1 crore to a levy of Rs 2,100, while the tax on the sale of futures has been hiked by 25% from Rs 1,000 on a turnover of Rs 1 crore to a levy of Rs 1,250 on the same turnover.
STT, introduced in 2004, is a tax levied on transactions involving financial securities, such as equity or equity derivatives, futures and options and mutual fund transactions. The move is expected to impact the volumes churned by High-Frequency Traders (HFT) machines. This, along with the withdrawal of the Do Not Exercise (DNE) facility, would be a major disappointment for those trading in the options segment.
Mutual Fund Tax Changes
As per the amendments in mutual fund rules under the Finance Bill 2023, capital gains from debt mutual funds will be treated as short-term capital gains; this means that the gains will be taxed at the investor’s income tax slab rate, reducing the tax advantage offered by such investments.
Investors pay long-term capital gains tax at 20% on debt funds held for over three years, with indexation benefits significantly lowering the tax. These benefits used to apply to other asset classes, including gold and international funds, but will be removed from April 1, 2023. The amendment applies to all specified mutual funds, where no more than 35% of total proceeds are invested in domestic equity shares.
The move aims to remove tax arbitrage, as the government has proposed similar taxation policies for insurance products. The amendment is expected to impact senior citizens and high-net-worth individuals but not those whose investment strategy is unaffected by tax implications.
During her budget presentation, Finance Minister Nirmala Sitharaman announced several changes in taxation policies. Offshore banking units in GIFT City will receive enhanced tax benefits, with a 100% deduction on income for 10 years. However, the tax on royalty or technical fees earned by foreign (non-resident) companies has been hiked from 10% to 20%.
The taxation of non-par savings insurance products remains unchanged, with a cap of Rs 5 lakh. Despite representation, there will be no change in the taxation of InviTs. REITS will not be taxed as capital gains but instead as ‘income from other sources.
The minister announced that a committee would be set up under the Finance Secretary to address the needs of employees regarding the pension system and emphasised the need to improve the national pension system for government employees.
The RBI will investigate credit card payments for foreign tours that may not fall under the Liberalised Remittances Scheme (LRS). These payments have the potential to evade tax collection at the source.