Budget expectations 2024 for Indian Asset Management industry

India has emerged as one of the fastest-growing economies in the world and is expected to be one of the top three economic powers over the next decade. In FY 23-24, India’s GDP grew at around 8.2% and as per the International Monetary Fund (IMF) estimates India’s GDP is poised to grow at around 7%. Further, according to a recent report released by PHDCCI, India is set to become a $7 trillion economy by 2030, thereby establishing itself as the second-largest economy in Asia-Pacific region and third-largest economy globally. 

One of the key drivers for India’s robust growth is its strong and robust financial services sector, backed by capital inflows into the country and sufficient liquidity in the economy over the last few years. The key avenue of such funding has been the resilient and vibrant asset management industry comprising Mutual funds, AIFs, REITs, InvITs, FPIs, etc.  

Data points and Industry overview 

One of the key segments within the financial services sector is the Mutual Fund industry. In FY 2024, AUM of the domestic mutual fund industry grew by over 35%. AIFs, which have been growing exponentially over the last decade, continued to show a healthy growth in FY 2024 and as per latest statistics released by SEBI, cumulative capital commitments raised by AIFs stood at INR 10.85 lakh crores as of December 2023, of which INR 4 lakh crores has already been deployed by them. With regards to investments under FPI route, as on date, total AUC of FPIs stood at around INR 72 lakh crores. 

The Indian asset management industry has now become a key source of capital (debt and equity) for providing medium term, long-term and even high-risk capital to various businesses in India. This includes investments to incubate innovative ideas and start-ups in new age sectors ranging from fintech, e-commerce, healthcare, technology, education, artificial intelligence and renewable energy.   

In addition to just being pooling vehicles, Indian asset management industry has helped Indian portfolio companies to contribute to India’s economic development through outcomes such as: 

• Higher job creation in country 
• Higher tax collections for Government 
• Better corporate governance standards 
• Better financial performance 
• New product innovation 

One of the key factors for the growth of the AMC industry in India has been a stable and predictable tax regime especially over the last 10 years. While, the Government has announced various measures to promote growth of Indian asset management industry and in-turn the Indian economy, below are certain ‘Asks’ / ‘Expectations’ of asset management industry from the tax law perspective:  

• Category III AIFs do not have a specific tax code and are taxed as per extant tax laws for trusts, which were historically drafted in the context of family trusts. Having a specific tax code for Category III AIF would alleviate the tax uncertainty and attract capital into Category III AIFs in India.  
• Tax code should be amended for Category III AIFs (and their investors) in India to permit deduction of expenses incurred towards set-up, professional fees, management fees, etc.  
• Relaxation of some of the onerous conditions prescribed u/s 9A of the Income-tax Act, to make it more practical for global fund managers to consider it.
• Holding period of units of REIT and InvIT should be aligned with the holding period of listed equity shares (i.e. to 12 months), for qualifying as long term capital asset, to bring parity for unitholders of REIT / InvIT.  
• Income earned by IFSC GIFT City unit eligible for 100% exemption for 10 years out of 15 years, should not be subject to any withholding tax, to reduce the compliance burden for the said units.
• Any income earned by non-resident investors from transfer of offshore derivative instruments issued by non-bank entities in IFSC GIFT City will be exempt from any tax in India. 

Over the past many years, the Government and the Regulators have been proactive to address all possible policy related issues for the domestic fund industry. Addressing some of the above-mentioned practical issues in its full Budget in the year 2024, could go a long way to attract many more Indian and Overseas Fund managers to set-up pooling vehicles in India and thereby enable India to become a $7 Trillion economy by 2030. 

This article first appeared in the ET Insights on 23 Jul 2024.