Mutual fear: capital connections may go

The recommendations of the Kelkar committee are giving sleepless nights to mutual funds. The industry has closed ranks to try and ensure that the panel's recommendation to tax short-term capital gains and interest income do not slip into the Finance Minister's Budget proposals. So concerned are MFs that they have even given an alternative tax proposal, which they feel could generate more money for the exchequer than the Kelkar formula. The committee's suggested changes to the tax structure on income of MFs will put the industry in a very tight situation, says SK Mitra, MD, Birla Sun Life Mutual Fund. Industry officials feel that the proposal to tax short-term capital gains would discriminate between various investors of mutual funds and will also not get the desired results. Investors come in and go out on a daily basis from MF schemes. If tax is paid on short-term gains, then investors present in the fund at the time of the gain will bear the burden of the tax, irrespective of whether they participated in the gain. This is because the MF will have to pay taxes on capital gains as and when they sell the underlying security. Investors, who exit when the price of the security — and hence the net asset value (NAV) of the fund — goes up, are not hit. Only investors present when the gain is realised will be hit. This will also cause problems for NAV calculation and fairness in treating various investors. If the Kelkar committee recommendation is accepted, it would cause serious accounting problems for MFs. And some investors will have to bear the cost at the expense of others if the short-term capital gains tax is levied, says AP Kurian, president, the Association of Mutual Funds in India. MFs have suggested that while the mutual fund vehicle should continue to be exempted from tax, a distinction should be made between equity and debt fund for the purpose of tax treatment. They want total tax exemption to equity funds in line with the Kelkar committee's recommendations on corporate dividends and capital gains on equity. Instead, distribution tax could be levied from debt fund on a concessional basis, the MF suggested. The proposal given by Amfi is very practical where it is calling for a distribution tax on payout in fixed income funds. Any attempt to tax the mutual fund will further put the industry at a disadvantage. The industry should be allowed to grow so that the market will become more institutionalised, says Milind Barve managing director HDFC Mutual Fund. MF also wants level playing field with other financial sector players like insurance companies so that MF schemes could become a savings instruments for households. Another priority area in the MF wish-list is pension sector reforms. MFs want the government to expedite pension reforms in the country and to allow MFs to launch pension funds. Also they want contributions to pension funds up to Rs 50,000 to be tax exempt. Individuals should be allowed to plan their retirement benefits and MFs should be allowed to offer long-term tax deferred pension products, says Nikhil N Khatau, CEO of Sun F&C.

Mutual fear: capital connections may go

The recommendations of the Kelkar committee are giving sleepless nights to mutual funds. The industry has closed ranks to try and ensure that the panel's recommendation to tax short-term capital gains and interest income do not slip into the Finan...

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