Is high tax dissuading investors from debt products, asks Uday Kotak

Debt plays an important role in sustained capital formation but the current tax structure wherein debt products are taxed at very high rates compared to equity could be dissuading investors from looking at dept instruments, said Uday Kotak, Founder and Director of Kotak Mahindra Bank.

While speaking at a conference jointly organised by the Securities and Exchange Board of India (Sebi) and the National Institute of Securities Markets (NISM), Kotak said that while both equity and debt are needed for long-term sustained growth, the broad gap between the tax rates on the two product categories could act as a deterrent for debt instruments.

“We need equity but it is not a one-leg race, it is a two-leg race and we need debt. And to put it very bluntly, I think from the position of a saver or an investor, if I am taxed 10% on equity, I do believe 40% marginal tax on debt certainly dissuades every saver from considering the debt options,” said Kotak.

“Therefore, we need to look at the gap and I am not suggesting in any particular direction. But 10% to 40% is a very large gap in terms of outcomes and it is therefore quite surprising that today an equity trader in the markets with 6:1 debt equity (ratio) can borrow at lower rates than a AAA rated corporate,” he added.

He further highlighted the fact that debt is not only coming from the banks in the form of bank deposits but also from the bond markets, REIT market, and the regulators and fiscal policy makers need to have a close working together.

“So, we need to look at how the entire financial system currently is to see how both the legs of the market (equity and debt) work in tandem for sustained growth over a long period of time,” he said.

This assumes significance as the government in the Finance Act 2023 proposed that capital gains from debt funds and certain categories of non-equity mutual funds would be taxed at a higher rates.