The Hindu Business Line : Mutual funds seek clarification on capital gains tax

FRESH Inflows to the mutual fund industry have been significantly impacted in the past fortnight due to the lack of clarity on the capital gains tax issue, say asset management companies.

The mutual fund industry is awaiting clarification on the capital gains tax issue on mutual fund units. It is hoped that this will be part of the announcements that the Finance Minister is expected to make on Wednesday.

The Association of Mutual Funds in India has submitted a memorandum to the Finance Minister regarding the extension of the new capital gains regime on securities to be made applicable to mutual fund units as well. Also, Mr G.N. Bajpai, Chairman, Securities and Exchange Board of India, has briefed the Minister about this issue during their meeting last week.

The memorandum submitted to Mr P Chidambaram has three significant points, said Mr A.P. Kurien, Chairman, Association of Mutual Funds in India (AMFI).

"First, we are seeking the removal of long term capital gains to be extended to mutual fund units. It is a discrimination against mutual funds and seeks to dissuade the common man from investing in mutual funds.

"Secondly, short-term capital gains at the flat rate of 10 per cent should also be applicable for mutual fund units.

"The transaction tax of 0.15 per cent is disproportionately high to the yield of debt instruments. Our recommendation is to abolish transaction tax altogether for these instruments," said Mr Kurien.

AMFI has also sought a meeting with the Finance Minister to discuss this issue. Though the meeting has not been fixed yet, the body is hopeful that these changes would be part of the clarifications on transaction tax.

Mr Chidambaram is expected to address the house on the budget at 2 p.m. on Wednesday, as announced by the Speaker Mr Somnath Chatterjee.

The confusion on the capital gains tax applicable to mutual fund units stems from the fact that new norms that were announced in the Union Budget 2004 were for securities. To qualify as a "security" under the definition of the word in Finance Bill, it has to be traded in an exchange. Mutual Fund units are bought and redeemed directly between the fund house and investor and very few mutual funds are listed for trading on the stock exchange.

As per the current definition, mutual fund units do not qualify for the reduction in short term capital gains and abolishment of long-term capital gains.

"We hope it is a question of semantics and an error of definition and would be corrected shortly. If not, we would have to pay transaction tax on underlying equity and debt instruments and not be able to offer capital gains relief to our investors. This renders mutual fund investments extremely unattractive," said the Chief Executive Officer of a fund house.

"We are following a wait and watch policy, as are most of our investors. If the clarification does not come early enough it would have a significant impact on our business," said a senior AMC official.

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