The Indian Finance Act, 2024 (Finance Act), passed pursuant to the Union Budget for the financial year 2024-25 (Budget 2024), brings a comprehensive set of reforms aimed at enhancing the country's financial sector. This article delves into the key proposals in the Finance Act and their implications on the debt capital markets in India.
Rationalisation and Simplification of Capital Gains Taxation
One of the significant changes introduced in the Finance Bill is the rationalisation and simplification of the taxation of capital gains.
Unlisted Debt Securities:
Change: Unlisted debentures, bonds, debt mutual funds and market linked debentures that are transferred, redeemed, or mature on or after 23 July 2024, are now treated as short-term capital assets regardless of the holding period, attracting short-term capital gains tax.
Impact: To mitigate the need for offering higher returns due to this tax impact, issuers may now opt for tax-efficient listed debt instruments. This policy adjustment seeks to enhance liquidity in the listed debt capital markets. However, issuers must consider the added regulatory compliances and cost involved therein.
Listed Debt Securities:
Change: Listed debt securities will now be taxed uniformly at 12.50% without indexation benefit, instead of being taxed at 10.00% without indexation benefit. The holding period remains the same at 12 months.
Impact: While there is an increase in the tax rate to 12.50%, the broader rationalisation of capital gains tax is expected to have minimal impact. Given the overall push by the Government to promote the listed regime, it is likely that the overall market for such listed debt securities will only increase.
Listed Units of Real Estate Investment Trusts and Infrastructure Investment Trusts:
Change: Long-term capital gains on listed REITs and InvITs will now be taxed at 12.50%, up from 10%, with the holding period reduced to 12 months (down from 36 months). Short-term gains are taxed at 20%, up from 15%.
Impact: The higher long-term tax rate is balanced by the shorter holding period, promoting long-term investment in REITs and InvITs while discouraging short-term trading. This move is expected to boost capital access for real estate and infrastructure sectors, positively impacting debt markets.
Financial Sector Vision and Strategy Document and other proposals
In Budget 2024, the finance minister announced a financial sector vision and strategy document (vision document), intended at setting the agenda for the next five years, guiding the government, regulators, financial institutions, and market participants. The Budget announcements include the simplification of foreign direct investment and overseas investment policies, which are expected to streamline the foreign investment process in India and improve overseas investment by Indian entities. It is also expected that the Vision Document will contain proposals of the Government towards fostering and further improving the debt capital market regime in India.
Conclusion
The rationalisation of capital gains tax is expected to boost long-term participation in India’s debt capital market. However, this could negatively impact the market for unlisted debt securities. The increased tax burden may deter issuers from offering these securities, as they become less appealing to potential investors. Consequently, this could lead to a decline in the market for unlisted debt securities. Nevertheless, the efforts of the Government and the regulators to create a more efficient and investor-friendly environment are expected, over time, to bring parity to debt and equity capital markets, thereby stimulating economic growth. As the new regulations take effect, stakeholders will need to adapt to the evolving landscape and leverage the opportunities presented by these reforms.
