Regulatory and Tax matters - NEwspaper Summary

 The sources provide extensive information on Regulatory and Tax Matters, detailing how policy, oversight, and fiscal measures influence stability, structure, risk, and returns within the broader context of Investment and Financial Market Dynamics.

I. Taxation and Investment Vehicle Structure

Regulatory definitions significantly dictate the taxation treatment and portfolio requirements for various investment vehicles, particularly hybrid mutual funds and fixed income alternatives.

1. Differential Taxation of Mutual Funds

The Securities and Exchange Board of India (SEBI) defines categories of hybrid funds, and the allocation mandates determine their tax status, which directly impacts investor suitability and net returns.

• Equity Taxation Advantage: Funds maintaining a gross equity exposure exceeding 65 per cent qualify for equity taxation. This includes:
  • Aggressive Hybrid Funds (AHFs): Since their equity allocation exceeds 65 per cent, long-term gains (over 12 months) are taxed at 12.5 per cent above ₹1.25 lakh, while short-term gains face a 20 per cent tax.
  • Arbitrage Funds: These funds also enjoy equity taxation because their equity exposure is mandated to be over 65 per cent.
  • Equity Savings Funds and most Balanced Advantage Funds (BAFs) typically enjoy equity taxation due to their gross equity allocations being above 65 per cent.
• Non-Equity/Slab Rate Taxation:
  • Conservative Hybrid Funds (CHFs): These funds, which typically hold 75–90 per cent in debt, are now taxed at slab rates, similar to bank deposits. This change occurred after the 2023 Budget withdrew tax concessions and indexation benefits for funds with equity allocation below 35 per cent.
  • Certain BAFs (with 35–65% equity) and Multi Asset Allocation Funds (MAAFs) that fall into the ‘non-equity, non-debt’ category are taxed at 12.5 per cent after 24 months, with short-term gains taxed at slab rates.
• Adverse Debt Taxation: The attractiveness of traditional debt or fixed income investments has suffered in recent years due to adverse taxation and the removal of indexation benefits.

2. Taxation of Derivatives and Business Income

For individual investors dealing in derivatives, specifically Futures and Options (F&O) contracts, regulatory classification dictates the tax burden:

• Income or loss from F&O trading is deemed normal business income (non-speculative business), as Section 43(5) of the Income Tax Act, 1961, specifically excludes derivative transactions from the meaning of speculative transactions.
• Consequently, F&O gains are not treated as Short-Term Capital Gains (STCG) taxed at 20 per cent. Instead, they are added to the total income and taxed under the head 'Profits and Gains From Business or Profession' according to the progressive tax slab rates (ranging from 0% to 30% for FY26). Investors can also deduct associated expenses like brokerage fees and subscription charges as business expenses.

II. Regulatory Oversight and Consumer Protection

Various regulatory bodies are actively engaged in measures impacting the stability and transparency of financial markets.

1. Unclaimed Financial Assets Campaign

Union Finance Minister Nirmala Sitharaman launched a nationwide awareness drive to return ₹1.84 lakh crore of unclaimed financial assets. These unclaimed assets include bank deposits, mutual funds, insurance proceeds, dividends, and pension funds, currently held in the government’s "safe custody".

• The campaign, "Aapki Poonji, Aapka Adhikar," is coordinated by the Department of Financial Services and involves major regulators and entities, including the RBI (Reserve Bank of India), SEBI, IRDAI (Insurance Regulatory and Development Authority of India), PFRDA (Pension Fund Regulatory and Development Authority), and the IEPFA (Investor Education and Protection Fund Authority).

2. Banking and NBFC Regulation

Regulatory mandates are forcing structural changes in the financial sector:

• NBFC Listing Mandate: Tata Capital's IPO is necessitated by the RBI-imposed, scale-based listing mandate for ‘Upper Layer’ NBFCs.
• Banking Practices: Indian Overseas Bank (IOB) announced a waiver of penal charges for non-maintenance of Minimum Average Balance (MAB) in certain savings accounts, aiming to ease the banking experience.
• Monetary Policy Influence: Historically, central bank actions have drastically altered market dynamics. The Volcker shock in 1981 saw the Fed Chairman increase the fed funds rate to 20 per cent, successfully lowering inflation expectations and causing gold prices to fall 33 per cent, while the dollar index surged 16 per cent. Today, public confidence that inflation will be tamed is eroding partly due to the US Fed failing in its inflation mandate for four years and yet cutting rates.

3. NPS Reforms and Insurance Regulation

The Pension Fund Regulatory and Development Authority (PFRDA) is proposing changes to the National Pension System (NPS) rules, granting greater flexibility:

• Investment Flexibility: From October 1, a new Multiple Scheme Framework (MSF) is effective, allowing subscribers to invest in multiple schemes. Crucially, it allows 100 per cent investment in equity, up from the previous maximum of 75 per cent.
• Withdrawal and Exit Proposals: Proposals include reducing the compulsory annuitisation component from 40 per cent to 20 per cent, and allowing early exit from the NPS after 15 years, regardless of the subscriber attaining age 60.
• Part Withdrawal Changes: Proposed reasons for partial withdrawal now include paying margin money for property/vehicle loans and repayment of financial assistance (loans) from regulated financial institutions. The frequency of part withdrawals is proposed to double to ** six times** before retirement (or 15 years in the scheme). A loan against NPS investment is also proposed to be allowed, requiring a lien to be marked on the account.
• Health Insurance Regulation: The IRDAI has made several changes to make health insurance more accessible for the elderly, including removing the entry age limit, reducing the moratorium period from 8 years to 5 years, and decreasing waiting periods for pre-existing diseases.

4. Regulatory Measures in Taxation (GST and Refunds)

Government intervention through consumption taxes (GST) and subsequent administration impacts business liquidity:

• GST Impact on Sales: The transition to GST 2.0 revision caused a sales slowdown for passenger vehicles and electric vehicles in September, as purchases were deferred in anticipation of price cuts stemming from the GST change. The GST cut is already showing signs of strong growth returning to the durables sector.
• Provisional GST Refunds: The Central Board of Indirect Taxes and Customs (CBIC) mandated that 90 per cent provisional refunds for low-risk assessees, including those filing due to Inverted Duty Structure (IDS), apply to applications submitted after October 1. This mechanism aims to benefit low-risk exporters. However, to qualify for the provisional refund, taxpayers must ensure they have no pending disputes, show cause notices, or appeals related to similar refund issues and have not faced prosecution for certain offenses under GST or earlier tax laws in the last five years.

III. Trade Policy and Global Market Dynamics

Geopolitical and trade policy decisions exert massive pressure on market dynamics, creating volatility and influencing asset preferences.

• Tariff Wars and Geopolitical Uncertainty: Global trade relations, characterized by "tariff wars" and geopolitical uncertainties, increase investor anxiety. These factors combine to erode trust in fiat currency, providing an environment where gold thrives.
• Free Trade Agreements (FTAs):
  • The trade turmoil caused by US President Donald Trump hastened efforts between India and Britain to clinch an FTA. The India-Britain deal aims to cut tariffs on goods like cars and whisky and grant increased market access.
  • India and the EU are pressing on with FTA talks to diversify trade, hedge against uncertainties, and strengthen supply chains in response to trade closing/tariff raising actions by other countries (an indirect reference to the US). Key contentious points in the EU-India negotiations include duty cuts on specific Indian imports and issues surrounding the EU’s carbon tax.
• Fiscal Deficits: Very high fiscal deficits in the US and other developed economies are contributing factors currently driving the upsurge in gold prices.