For a one-year period ending June 2019, the S&P 400 MidSmallCap Index (total return) has declined 7 per cent, while the S&P BSE 100 index (total return) has gone up by 10 per cent.
The proposals in the Union Budget hint that the government will use the mutual fund (MF) route more aggressively to meet this year’s Rs 1-trillion-plus disinvestment target.
It has proposed tax exemptions to exchange traded funds (ETFs) that have central public sector enterprises (CPSEs) as the underlying. These ETFs will get the status of equity-linked savings schemes (ELSS). Additionally, the Budget has proposed extending the concessional tax rate of short-term capital gains to equity-oriented fund of funds (FoF) that are set up for disinvestments in state-owned companies or CPSEs.
"Equity-oriented FoF attract short-term capital gains tax of 30 per cent. The Budget has proposed reducing it to 15 per cent for FoF used for disinvestment," said Bhavin Shah, partner and leader (financial service tax), PwC India.
FoF are subject to higher short-term capital gains tax, given these are not treated as equity-oriented schemes for taxation purpose. As a result, the 30 per cent tax rate applicable for debt funds is levied on these too. The proposal aims to incentivise even those investors who wish to place short-term bets. Experts say this will make participation in new and follow-on fund offerings attractive to traders scouting for arbitrage gains.
“The FoF structure could give the government an on-tap option. This will help the government react dynamically to market sentiment, and help increase retail participation in capital markets
via CPSE ETFs,” said Sundeep Sikka, CEO of Reliance Nippon Life AMC. An FoF structure will also allow investors.