The mutual fund industry has high expectations from the Budget 2018 which will be presented by Finance Minister Arun Jaitley on February 1, 2018. Here are some key proposals submitted by Association of Mutual Funds in India, or AMFI, to the Finance Ministry:
Introduce Debt Linked Savings Scheme (DLSS)
Introduce DLSS on the lines of equity linked savings scheme (ELSS), to channelize long-term savings of retail investors into corporate bond market which would help deepen the Indian bond market. Investments up to Rs 1.50 lakh under DLSS can be eligible for tax benefit under Chapter VI A, under a separate sub-Section and subject to a lock in period of five years (just like tax saving bank fixed deposits).
Alignment of tax treatment for retirement/pension schemes of mutual funds and National Pension System (NPS)
As in the case of NPS, investment in retirement benefit/pension schemes offered by mutual funds up to Rs 1.50 lakh should be allowed tax exemption under Sec. 80CCD of Income Tax Act, 1961, instead of Sec. 80C, with EEE status i.e., subscription being eligible for tax exemption, any accrued income being tax-exempt and withdrawal also being exempted from tax. The switches of mutual fund linked retirement plan (MFLRP) investments between mutual funds should not be treated as transfer and may be exempted from capital gain tax. Further, AMFI has requested that the contributions made by an employer should be allowed as an eligible ‘Business Expense’ under Section 36(1) (iva) of the I.T.Act.
Include mutual Fund units among the specified tong-term assets qualifying for exemption on long-term capital gains under Sec. 54 EC
Mutual fund units that are redeemable after three years, wherein the underlying investments are made into equity or debt of ‘infrastructure sub-sector ’ as specified by RBI Master Circular in line with ‘Master List of Infrastructure sub-sectors’ notified by the Government of India, be also included in the list of the specified long-term assets under Sec. 54EC.
The rationale for this proposal is that most individuals liquidate their financial assets to purchase a residential property with or without the aid of home loans. Money once invested in immovable property using the sale proceeds from mutual funds or stocks never comes back into capital markets, as people invariably reinvest the capital gains arising from sale of an immovable property to buy another property & avail of capital gains tax exemption u/Sec. 54 or 54F. Thus, the flight of money from financial markets capital into real estate sectors has become an irreversible phenomenon.
Notify mutual fund units as long-term specified assets for exemption on long-term capital gains under Sec. 54 EE
Notify units issued by mutual funds that are registered with SEBI, having a lock-in for three years as “long term specified assets” under Section 54EE.
In 1996, the government had introduced Sections 54EA and 54EB of the Income Tax Act, 1961, with a view to channelize investment into priority sectors of the economy and to give impetus to the capital markets. However, these were withdrawn in the Union Budget 2000-01.
Align taxation on listed debt securities and debt mutual funds
The holding period for long term capital gains between direct investment in listed debt securities and through debt mutual funds should be harmonized and made uniform.
This can be done by bringing the two at par by treating investments in non-equity oriented mutual fund schemes which invest 65% or more in listed debt securities as long term, if they are held for more than 12 months, on similar lines of equity-oriented funds (wherein a fund is treated as equity-oriented fund if it invests 65% or more in equities.)
Definition of equity-oriented funds (EOF) to be expanded to include investment by fund of funds schemes (FOF) in EOF
The definition of EOF, should be revised to include investment in FOF schemes which invest predominantly i.e., 65% or more, in units of equity oriented mutual fund schemes.
The income distributed by such funds should be exempted from ‘tax on distributed income’ under section 115R of the Act; and
Redemption of units in FOF schemes investing predominantly i.e., 65% or more in EOF be subjected to the same capital gains tax, as applicable to sale of listed equity securities/units of equity oriented mutual fund schemes.
Removal of double taxation of securities transaction tax (STT) on equity-oriented funds and exchange traded funds
The incidence of STT being paid by the mutual funds on sale of equity shares in respect of mutual fund schemes should either be abolished altogether or levied only at the time of redemption by the investor. The rationale is that there is clearly a double levy of STT for an investor investing in the equity markets through the mutual fund route, i.e., via an EOF.
Rationalization of tax treatment of Infrastructure Debt Funds (IDF) of mutual funds and IDFs of Non-Banking Financial Company (NBFC)
Tax-exempt institutional investors in mutual fund IDFs should be exempt from dividend distribution tax under section 115R of the Income Tax Act.
The income from NBFC-IDF is in the form of interest, whereas the income from MF-IDF is in the form of dividend. The interest paid by NBFC -IDF attracts TDS @10% for Resident Investors, whereas the dividend distributed by MF-IDF is subject to Dividend Distribution Tax (DDT) under section 115R of the IT Act @ 25% for Individuals & HUFs and 30% for others (plus applicable surcharge).
Exemption from dividend distribution tax (DDT) in respect of tax-exempt institutional investors
Tax-exempt institutional investors such as The Employees' Provident Fund Organisation (EPFO), NPS, insurance companies, non-profit Section 8 companies etc. or pass-through vehicles who invest on behalf of their investors/contributors/ policyholders in mutual funds schemes or infrastructure debt funds of mutual funds, should be exempt from dividend distribution tax under section 115R of the Income Tax Act.
AMFI’s rationale is that although pre-tax returns from debt mutual fund schemes or infrastructure debt funds are competitive, due to the levy of DDT u/S. 115R, the post -DDT returns adversely impacts the net returns for the investors. This acts as a deterrent for tax exempt institutional investors from investing in mutual fund schemes and MF-IDFs, due to the disparity in the tax treatment of income earned from MF-IDFs vis-a-vis other interest-bearing financial instruments.
Rationalization of tax treatment on switching of investments under mutual funds v/s unit linked insurance plans or ULIPs
Have a level playing field and uniformity in taxation of investment in mutual funds schemes and ULIPs of insurance companies. Switching of investment within the same scheme of a mutual fund should be also not regarded as a “Transfer” under Section 47 of the IT Act, 1961 and be exempt from payment of capital gains tax.
Threshold limit in equity oriented mutual fund schemes to be lowered from 65% to 50%
The threshold limit of 65% should be reverted to 50% which was prevailing before June 2006. AMFI believes that reducing the threshold limit to 50% for being regarded as ‘equity-oriented fund’ would ensure that asset allocation products with equitable risks are also promoted leading to penetration of debt markets and promotion of real balanced portfolios and encourage more number of investors with lower risk appetite to invest in mutual funds.
Category III Alternative Investment Funds (AIF) should also be given pass-through status for income tax purpose
The current taxation regime renders the domestic AIF Category III (AIF-III) industry at a disadvantage to foreign AIFs or India focused hedge funds operating outside India and domiciled in tax favorable jurisdictions. Hence, this may lead to headwinds in the growth of the domestic AIF-III industry.
Parity in tax treatment of all three categories of foreign portfolio investors
This proposal would eliminate the risk of possible double taxation on account of indirect transfer in certain jurisdictions. It will also result in reduction of compliance burden on taxpayer which requires him to ensure withholding tax provisions on indirect transfer of Category III foreign portfolio investment. This will be helpful for the taxpayer in the light of compliance requirements under various statues and reforms.
These are extracts from AMFI’s budget proposal. The full proposals can be accessed here.
