The Telegraph
Wednesday , July 16 , 2014
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Debt mutuals seek redress

New Delhi, July 15: Mutual funds want the government to defer the imposition of long-term capital gains tax on debt schemes, which was announced in the budget.

However, the government believes the measure is valid as companies were parking surplus funds in these schemes to avail themselves of lower taxes.

The budget has changed the way incomes from debt mutual funds are treated.

For capital gains, such funds were earlier taxed at 10 per cent without indexation or 20 per cent with indexation, after a lock-in of one year. From now on, the lock-in is for three years, with the tax at 20 per cent with indexation.

Indexation is a technique to adjust income payments by means of a price index, to maintain the purchasing power of the tax payer after taking into account inflation.

Representatives of the Association of Mutual Funds of India (Amfi), which has already written to Sebi against the proposal, are likely to meet finance ministry officials next week to seek changes.

The tax takes effect from April 1, 2014 according to the budget announcements. However, finance ministry officials said this was likely to be clarified and the retrospective aspect of the tax withdrawn.

Amfi wants the measure to be limited to only close-ended funds. “To have the long-term capital gain tax on closed ended debt schemes and not on open ended debt schemes, gold exchange traded funds and funds of funds etc, as this would render this asset class unattractive for investment. This in turn could impact the liquidity and development of corporate bonds,” Amfi’s letter said.

Mutual fund executives say that at least if the government makes the taxation proposal prospective from April 1, 2015, they will be able to manoeuvre out of losing businesses and move on to other forms of funds.

Said Anish Thakkar, partner Ernst & Young: “Actually, the three-year lock in and tax at 20 per cent with inflation indexation is not bad. We have done a number of case studies with this new rate and find that with inflation ranging between 7 per cent and 9 per cent annually, one actually ends up paying less tax through this, rather than the old set-up of 10 per cent tax without indexation at the end of one year. However, with this tax regime, new customers have to be targeted.”