Budget 2014-15: Debt MF tax move faces opposition

Industry body Amfi says retail investors overlooked while changing debt fund taxation norms, contests official rationale

Mutual fund houses’ worries on Union Budget 2014-15 refuse to die, particularly regarding the provisions on the debt category, where it has 70 per cent of its assets.

The Association of Mutual Funds in India (Amfi) said under the new provisions for debt funds, the government had overlooked the number of affected retail investors. The fund houses said there should be differential tax treatment for individuals and companies, if the idea is to prevent the latter from taking advantage of lower tax breaks.

As on March, there were 6.7 million folios from retail investors in various debt schemes. There is no reason why there can’t be differential taxation for individuals and companies, said Amfi in a letter to the Securities and Exchange Board of India (Sebi). It has also petitioned the Union ministry of finance.

INDUSTRY DEMANDS

• Industry has 6.7 million retail folios in debt schemes
• There should be different tax rules for individuals and corporates in debt schemes
• Apply long-term capital gains (LTCG) tax only on closed-ended debt schemes
• Keep LTCG tax rate at 10% for open-ended debt schemes with minimum holding period of 12 months
• Non-equity funds do not mean only bond funds
• It appears all open-ended funds, gold funds and funds of funds come under the change
• Have uniform tax treatment for debt MF units and listed corporate and zero-coupon bonds

The Budget has proposed to increase the rate of tax on debt funds to a flat 20 per cent. Further, the tenure for claiming long-term capital gains (LTCG) has been increased to 36 months from the existing 12 months. The new norms will be applicable to units of MFs other than equity-oriented funds.

"In his speech, the minister said this arbitrage has hardly benefited retail investors as their percentage is very small among such MF investors. While the amount invested by retail investors might be small compared to corporates, the actual number of retail investors affected have been overlooked," their letter said.

The MF houses say the budgetary changes appear not only to eclipse fixed maturity plans (FMPs); the entire gamut of debt and gold schemes will be impacted. It said the change in taxation was targeted primarily at FMPs, as these schemes were directly competing against bank fixed deposits (FDs). “But it appears that through an oversight, all open ended debt funds and all non-equity schemes like gold, fund of funds and gold savings have also come under the purview of this change," says the Amfi letter to Sebi.

Amfi has said non-equity funds do not mean only bond funds. There are monthly income plans, gold exchange-traded funds and gold savings funds, debt-oriented hybrid funds, foreign fund of funds and others mostly used by individual investors, it said.

"The new provision clearly puts MF units at a disadvantageous position vis-a-vis debt securities and hence needs a re-look to provide a level playing field,” pleaded Amfi.

Further, the fund segment has requested for uniformity in tax treatment for debt MF units and listed corporate bonds and zero coupon bonds, as MFs invest in these bonds as underlying assets. It has objected to the increment of holding period for an MF unit (other than equity-oriented ones) from 12 to 36 months for LTCG, at a time when those for corporate and zero coupon bonds remained 12 months.

“Since the underlying assets of debt funds could be predominantly in listed corporate bonds and zero coupon bonds, it would be unfair to increase the holding period for LTCG purposes, especially when the holding period for the underlying asset is only 12,” said Amfi.

As on end-June, MFs had assets under management Rs 9.74 lakh crore.