MFs, alternative investment funds may come under ambit of new tax norms

0.1% tax collected at source may hit funds, investors

Mutual funds (MFs) and alternative investment funds (AIFs) may come under the ambit of the new tax collected at source (TCS) regime, which came into effect on October 1. This could hit the funds as well as investors.
 
The Finance Act, 2020, has inserted a sub-section (1H) in section 206C, mandating a seller to deduct tax equal to 0.1 per cent of sale proceeds if the value of goods sold exceeds Rs 50 lakh in a financial year. The collection is to be made at the time of transaction.
 
Since TCS provisions apply to the sale of "goods" by a "seller" whose turnover exceeded Rs 10 crore in the preceding financial year, all MFs and AIFs may fall within its purview. In such case, MFs and AIFs selling units become sellers, whereas investors purchasing them, buyers. At the time of redemption, MFs and AIFs could be construed as buyers, while investors as sellers.
 
Last month, the Central Board of Direct Taxes (CBDT) issued a circular to clarify the applicability of section 206C (1H). It said the section won’t apply to transactions of securities and commodities traded through recognised stock exchanges, or cleared and settled by recognised clearing corporations.
 
“There is ambiguity about whether shares and securities, including units of mutual funds, could be regarded as ‘goods’, and whether mutual funds and AIFs could be regarded as sellers’. The CBDT has carved out an exception for listed securities traded through stock exchanges from TCS provisions. This seems to suggest that TCS provisions could otherwise extend to the sale of shares and securities,” said Tushar Sachade, partner, PwC India.

The new regime

• Seller of goods shall collect tax @ 0.1% on amount received after Oct 1, 2020
• Buyer can get credit against his actual income tax liability
• If TCS deducted is more than tax liability, buyer entitled for refund of excess amount along with interest
• Ambiguity on who is ‘buyer’ and ‘seller’ in MFs, AIFs
• For Rs 1-crore purchase of units, MFs and AIFs need to withhold Rs 10,000 as TCS
• MFs will have to pay TCS while buying physical gold from authorised participants
• Investors paying TCS will have to claim refunds while filing returns

 
A senior MF executive said the deduction of the 0.1 per cent tax and subsequent filing for refunds would be chaotic. “The definition of who is a buyer and who is a seller is not clear. Funds are awaiting clarity and no one is deducting tax right now."
 
Experts are hopeful that MFs and AIFs will be granted an exemption from these provisions. The Association of Mutual Funds in India (Amfi) has written to the CBDT twice this year, asking it to exempt MFs registered with the Securities and Exchange Board of India from the definition of ‘buyer’ and ‘seller’ under section 206C (1H). The Indian Private Equity & Venture Capital Association is also considering making a similar representation on behalf of AIFs, said people in the know.
 
“Securities are specifically excluded from the definition of 'goods' and 'services' under the GST law. The CBDT has issued a clarification in the context of listed securities, and MF and AIF units are not listed securities. The units are not 'goods' on the basis of first principles, but only representative of something underlying,” said Hitesh Gajaria, senior partner, KPMG India.
 
TCS could impact funds and investors both. Take gold ETFs, for example, which hold physical gold as the underlying asset. TCS may be collected by the seller, typically an authorised participant, on the purchase of gold by MFs. Such tax will be locked up and will be unavailable for purchasing gold ETF units. MFs will have to claim a refund for the deducted tax.
 
“Since the income of a mutual fund or AIF is exempt, TCS could result in cash lock-up for investors till such time refunds are processed,” said Sachade.
 
Additionally, a buyer of securities may not have any income tax to set off this particular withholding. “Suppose a retired person who does not have regular income is doing an SIP in a mutual fund. Where will he set off this tax collected at source? He can only claim a refund,” said Gajaria.