Mufap opposes tax on capital gains through mutual funds

Any change in tax treatment without taking into confidence the mutual fund industry can have negative bearing on the development of the mutual fund industry, in general and the capital market in particular.
The Mutual Funds Association of Pakistan (Mufap) in a press release issued here on Thursday said that the mutual funds are passed through vehicle and have been given a level playing field all over the world. The situation was not different in Pakistan, however over the years there had been some attempts to make certain changes relating to tax status of mutual fund which were later on withdrawn upon representation from the mutual fund industry.
The capital gain from the shares of public company is exempt from levy of income tax. To provide a level playing field to the investors of mutual funds, a letter from CBR was issued in September 2002 whereby it was clarified that such portion of dividend which is related to capital gain is exempt in the hands of the recipient (mutual fund investor) as long as the capital gain is exempt for everyone else.
This clarification has now been withdrawn on July 09, 2007 by CBR. According to them this would mean that a person realising capital gains directly from the market on shares of a public company would not have to pay any tax, whereas capital gains distributed through the mutual funds would be taxed. "This would have adverse consequences on the small savers of mutual funds, especially thousands of small savers of National Investment Trust (NIT)", the press release said and added that the small investors through mutual funds will be the only persons in Pakistan paying tax on capital gains.
Furthermore, the letter withdrawing the clarification was issued on July 09, 2007 and blatantly states that it is effective retrospectively from July 01, 2007. The whimsical move has left thousands of stakeholders including fund managers wondering whether the distributed portion of capital income for the FY07 is taxable or not.
Such decisions could cause frustration and embarrassment to fund managers who have already made announcements and have run their processes without taking into account the impact of withholding tax. This matter is being taken up by the mutual fund association of Pakistan with the senior officials of CBR and it is hoped that always mutual funds would be allowed a level playing field and this clarification would be reinstated, the press release said.-PR