Tax matters for Mutual Fund 18 February 2012
Contents 1 Indian Tax regime for Mutual Fund and its constituents 2 Important Decisions 3 Recent Controversy 2
Indian Tax regime for Mutual Fund and its constituents 3
Mutual Fund Key Tax Implications Income-tax Entire income of SEBI registered mutual fund Exempt from income-tax Income distribution tax Nature of Fund Recipient Rate of tax * Money market mutual fund or Individual or HUF 27.038% liquid fund Any other person 32.445% Fund other than money market mutual fund or liquid fund Individual or HUF 13.519% Any other person 32.445% Equity-oriented mutual fund Any person Nil * Including surcharge and education cess 4
AMC Key Tax Implications Income-tax AMC taxed like a normal domestic company Corporate income-tax rate of 32.445 percent (including surcharge, where applicable and education cess); or Minimum Alternate Tax of 20 percent (including surcharge, where applicable and education cess), if income as per Book Profit is more than income computed as per the normal provision of the Act Dividend Distribution tax (DDT) Dividends distributed by AMC DDT at 16.223 percent (including surcharge and education cess) Withholding tax AMC to withhold tax at appropriate rate on different streams of payments 5
Tax implications for investors of Mutual Fund Dividend Income Dividend received by an investor from the mutual fund Exempt from tax Securities Transaction Tax Transaction Rate of tax Payable by Purchase/Sale of units of equity oriented mutual fund (delivery based) 0.125% Purchaser / Seller Sale of units of equity oriented mutual fund (non-delivery 0.025% Seller based) Sale of unit of an equity oriented fund to the mutual fund 0.25% Seller Deduction from total income Investment by individuals/ HUFs in units of Equity Linked Savings Scheme eligible to claim deduction upto an aggregate of Rs. 1 lakh 6
Gains on transfer / redemption of units Corporates Particulars Short Term Capital Gains Long Term Capital Gains If net taxable income does not exceed INR 10 million If net taxable income exceeds INR 10 million If net taxable If net taxable income does not income exceeds exceed INR 10 INR 10 million million Sale transactions of unit of an equity oriented fund which attract STT Domestic Companies 15.45% 16.22% Nil Foreign Companies 15.45% 15.76% Nil Sale transaction other than those mentioned above Domestic Companies 30.9% 32.45% 20.6% / 10.3%* 21.63% / 10.82%* Foreign Companies 30.9% 31.51% 20.6% / 10.3%* 21.01% / 10.50%* * 20 percent with indexation and 10 percent without indexation 7
Gains on transfer / redemption of units Non Corporates Particulars Short Term Capital Gains Long Term Capital Gains Sale transactions of unit of an equity oriented fund which attract STT Non corporates 15.45% Nil Sale transaction other than those mentioned above Individuals (resident and non-residents) Progressive slab rates** Firms including LLP (resident and non-resident) 30.9% 20.6% / 10.3%* *20 per cent with indexation and 10 per cent without indexation ** These rates will further increase by education cess 8
Important decisions
Birla Sunlife Asset Management Co. Ltd Facts AMC of Mutual Fund made payments to investors from United Arab Emirates ( UAE ) upon redemption of its debt scheme units without deduction of tax at source India-UAE tax treaty Capital gains arising on redemption of units in mutual fund in India to be taxed only in UAE Tax officer initiated proceedings under section 201(1) and 201(1A) of the Income-tax Act, 1961 ( the Act ) Separately, Tax officer issued notice under section 163 - AMC to be an agent of non-resident investors Issue Whether AMC of a Mutual Fund can be considered as an agent of non-resident investors under section 163 of the Act 10
Birla Sunlife Asset Management Co. Ltd Contd ITAT s ruling Income accruing or arising to a non-resident through a transfer of capital asset situated in India is taxable under the provisions of section 5 of the Act AMC treated as an agent of non-resident investors If non-resident investor not liable to tax in terms of the tax treaty provisions Merely having an agent in India not to affect his tax liability Key take-aways Section 201(1) and section 163 of the Act, operate in different fields Proceedings under both sections can be simultaneous Considering language of section 163(1)(c) of the Act, income-tax authorities may treat any person paying any income to non-resident as an agent of the non-resident Representative assessee is liable only to the extent of income paid by him and not in respect of any other income 11
Templeton Asset Management (India) (P) Ltd Facts Taxpayer AMC of a Mutual Fund Taxpayer claimed investment advisory fees lower than the ceiling prescribed under SEBI Regulations Taxpayer recovered part of marketing and recurring expenses (less than ceiling prescribed by SEBI) from Mutual Fund and absorbed balance expenditure as a matter of commercial prudence Bombay High Court Ruling SEBI regulations prescribe the maximum limit of investment advisory fees, marketing and recurring expenses that can be recovered/charged by AMC to Mutual Fund Notional fee income - Not to be taxed in the hands of Taxpayer Part of marketing and recurring expenses borne by Taxpayer Cannot be disallowed due to bona fide commercial reasons 12
Recent Controversy
Live issue Taxation of income received by Trust from Pass Through Certificates ( PTCs ) issued to Mutual Funds Flow chart depicting securitization debt transaction Originator Bank / Financial Institution Borrower Obligor Purchase consideration of Loan Assignment of Loans Loans Interest Trust Interest Originator Bank / Financial Institution Issuance of PTCs Return on PTCs Mutual Funds (Investors) 14
Securitized debt transaction Process and Tax implications Process Originator i.e. Bank or Financial institution sells pool of loans to SPV (generally a trust) Trust becomes legal owner of investment represented by pool of loans Originator assumes responsibility of collecting receivables from borrowers/ obligors Trust raises money from various investors in return of PTCs On redemption of PTCs, Trust is discharged of all its obligations Taxation of Trust (having determinate share) Income received by Trust represents income of beneficiaries Where Mutual Fund is a beneficiary Income received by Trust is exempt from tax 15
Securitized debt transaction Assessment of Trusts Contention of Income-tax authorities Mutual Funds have formed an association of person to invest in PTCs Mutual Funds Indirectly carrying out lending activity through Trust Per se not permissible by SEBI Provisions of section 161(1A) of the Act applied Instead of section 161(1) of the Act Interest received by Trust from pool of loans Taxable under the head Income from Business and Profession at maximum marginal rate 16
Securitized debt transaction Impact on Mutual Fund and its Investors Impact / Issues Potential tax demand (pertaining to earlier years) by the income-tax authorities could lead to Significant erosion in current NAV of Mutual Fund Open ended schemes of Mutual Funds could face pressure as investors in relevant period may no longer be investors in the current schemes Close ended schemes of Mutual Funds No mechanism to recover unforeseen taxes from investors in the relevant earlier period 17
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Thank You For further information please contact: Keyur Shah Chartered Accountant keyur@kpmg.com 19