Shome panel report makes MF advisors see red

Report hasn't recommended short-term gains from MFs to be exempted from tax

Even as the mutual fund (MF) sector awaits the fine print of the recently announced sops from the market regulator, it is unnerved by the silence of the Parthasarathi Shome panel report on short-term gains from investments in equity mutual funds.

On Saturday, the panel, which was appointed by the ministry to have a second look on General Anti-Avoidance Rules and other tax proposals related to foreign investments, submitted sweeping recommendations, which included abolition of tax on “short-term gains from transfer of listed securities,” whether treated as capital gains or business income.

“The committee recommends the government should abolish the tax on gains arising from transfer of listed securities, whether in the nature of capital gains or business income, to both residents as well as non-residents,” the report said.
 

LEVEL PLAYING FIELD

• Shome panel recommends abolition of tax on short-term capital gains
  
• No reference to mutual funds in report
  
• Fear this could make direct investments more attractive than MFs
  
• Advisory bodies write to ministry, Sebi

To offset the losses to the exchequer, it suggested a commensurate increase in Securities Transaction Tax. However, it does not expressly provide anything on gains from investments in MFs.

MF advisors fear if the proposal goes through in its current form, it may lead to a situation where investors in equity mutual funds are put at a disadvantage. While units of close-ended equity schemes are compulsorily listed on the exchanges, most open-ended equity schemes are not listed on the stock exchanges and do not strictly fall under the definition of “listed securities”.

MFs typically repurchase units and refund the money when investors want to sell them. “The MF-equity schemes should also be included under this recommendation. If the report is implemented or passed by Parliament, without having the equity mutual funds schemes under the said recommendation, it will be an anomaly,” said Satish Kumar, a Chennai-based independent financial advisor.

“Investors, thereon, would like to trade in the markets directly and not invest in MF equity schemes, since they will be exempt on STCG only if they trade in listed securities,” he said.

“We have written to the finance ministry and Sebi,” said K Ramesh Bhat of IFA Galaxy, an organisation of fund advisors.