Our Wish List for the Union Budget

Budget wish list

For the first time, since Independence, the government has decided to present the budget on February 1 instead of the last day of the February. The Cabinet decided last September to merge the Railway Budget with the Annual Budget, ending a nearly century-long practice. Post the recent popular moves by government, all eyes are on the Finance Minister to see what he will bring to the table for the people of India. I would like to take this opportunity to list my expectation from Budget 2017-18.

Use of Technology, Digital approach

The 11-member Committee on Digital Payments headed by Niti Aayog principal advisor Ratan Watal submitted its report to the Finance Ministry on 9 December 2016. “The vision of the committee is to set a roadmap for digital payments to grow substantially over the next three years from the current level of about five percent of personal consumption and twenty per cent of all transactions,” said the report of the Committee on Digital Payments.

The committee recommended Aadaar based eKYC and paperless authentication including cases where Permanent Account Number (PAN) is not available. A move that would surely benefit potential investors as, according to Wikipedia, Aadhaar issuance has covered around 85% of India’s population and the penetration of PAN is much lower.

The committee recommends that cash transaction should be disincentivised by imposing nominal charges after a certain limit. Additionally, the Committee recommended that consumer payments to government department/utilities can be a good starting point for such handling charges. The committee has suggested government should withdraw all charges on digital payments and bear the cost of such transactions. On taxation front, committee suggested government should provide option to consumers to pay digitally, including payment of fines and penalties and taxes, while intensifying the payers for more usage of digital channel. The use of technology would definitely improve penetrations and provide people with single alternatives.

It would provide a boost to India’s cashless aspirations if some of these recommendations find their way into the Finance Minister’s speech on Feb 1.

Jan Dhan Yojana

In a quest to improve financial inclusion; many changes have been made by the government to its Jan Dhan Yojna. In December 2016 the number of accounts stood at 262 million compared to 198.3 million on a year-on-year basis. The scheme seems to have reached the masses and numbers are growing every day.

In my view Mutual Funds should be a part of this financial inclusion program. This will help in mutual fund penetration and an ease of access to mutual fund investments for investors. From an account holders perspective, their savings will be invested in instruments that could potentially give better returns than the interest earned from their bank accounts, not to mention the fact that their savings will be managed by professional fund managers.

In my view Mutual Funds should be a part of this financial inclusion program.  This will help in mutual fund penetration and an ease of access to mutual fund investments for investors. From an account holders perspective, their savings will be invested in instruments that could potentially give better returns than the interest earned from their bank accounts, not to mention the fact that their savings will be managed by professional fund managers. 

Pension tax break u/s 80CCD for Mutual Funds

Presently the National Pension System (NPS) is for citizens aged between 18 to 60 years, on a voluntary basis. Currently only investments made through NPS up to Rs. 50,000 a year is allowed to deduction under section 80CCD of the Income Tax Act, 1961. This is over and above Rs. 1.5 lakh a year under section 80C.

In my view investments through mutual funds managing pension plans should also be allowed to get deduction under section 80CCD. Moreover, very few pension plans by mutual fund get a nod from Central Board of Direct Taxes (CBDT). I believe investments in equity markets through mutual funds, over a long period, could be better suited for a pension plan and could allow investors to make the most of the rising market. Therefore, the CBDT should get rid of the cumbersome process and could look at an auto-approval methodology that welcomes more MF schemes for investors.

The 2014 Union Budget did mention ‘uniform tax treatment for pension fund and mutual fund-linked retirement plans’. However, further details are still awaited as to how this can be operationalized.

Enhanced tax benefits for investments

Presently section 80C giving tax break of up to Rs 1, 50,000 is crowded with too many options and ELSS is one of them. By offering an altogether dedicated section for it I believe ELSS will receive an automatic boost and many investors will be attracted to it. This would bring the much-needed domestic funds to the capital markets and also inculcate the habit of investing in market oriented, growth assets among households.

Also investors are now allowed for exemption in capital gains tax under section 54EC. This benefit now could be extended to mutual funds who in turn will invest in infrastructure sector, so that investors can save more tax and more money is pushed into mutual funds and improve the infrastructure sector.

Favorable tax treatment for Equity Fund of Funds

Taxation and investment go hand-in-hand. While considering investment opportunities, the first challenge that almost every investor faces is choosing among a plethora of options. Equity Fund of Funds is a fund that invests in multiple other equity funds, is presently not favored by many investors due to the reason that they do not enjoy the similar tax treatment as other equity funds. The fund is eligible to classify as an equity fund as it invests only in the equity market. However, in reality, a Fund of Funds is taxed as a debt fund.

When the underlying securities are equity, ideally, the Fund of Funds too should be counted as an equity fund. This is a matter that we’ve been hoping every budget will address and mutual funds have been hopeful for this happening for too long. This budget, we again hope, will make it come true.

AMCs by Individuals

In the banking sector RBI, licensed individuals to operate small finance banks & payments banks to carry forward the regulator's objective of deepening financial inclusion. In the mutual fund industry, too, by allowing eligible individuals to start an AMC we will encourage both individuals and investors to invest in mutual fund schemes in India. With more and more good and honest players in the industry, investors will have quality mutual fund schemes & services to choose from. In the US, some of the large fund houses today were initially started by individuals. Vanguard and Templeton, both mammoth fund houses today, were started by individuals - John Bogle and Rupert H. Johnson, Sr. respectively.

In the Union Budget 2014-2015 presented on July 10, 2014, the Hon’ble Finance Minister announced that: “After making suitable changes to current framework, a structure will be put in place for continuous authorization of universal banks in the private sector in the current financial year. RBI will create a framework for licensing small banks and other differentiated banks. Differentiated banks serving niche interests, local area banks, payment banks etc. are contemplated to meet credit and remittance needs of small businesses, unorganized sector, low income households, farmers and migrant work force”. Later, on November 27, 2014 RBI released Guidelines for Licensing of Payments Banks. Similarly from the upcoming union budget I look forward for some positive reforms and incentives from the finance ministry that will facilitate individuals to start an AMC in mutual fund profession.

I hope that this Budget will have financial inclusion through mutual funds as a principal theme by giving much needed attention to the mutual fund investors.

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.

Above article is authored by Quantum.

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