This is with reference to a news item published in Business Recorder on June 12, 2006 wherein the Mutual Funds have criticised the levy of tax on their CFS income on the grounds of tax neutrality and level playing field.
In fact, it is precisely for level playing field that this amendment is being proposed by CBR and I wholeheartedly support the same.
Previous to this amendment, individuals, banks, DFIs and companies, doing CFS business as market participants, were paying 10 percent withholding tax at source and balance at the time of final assessment, which in the case of banks, DFIs, companies and practically for high net worth individuals as well worked out to a cumulative levy of 35 percent.
(Any incremental income of an individual over Rs 1 million attracted a tax rate of 35 percent). On the other hand, mutual funds ended up paying 10 percent tax as full and final liability on distribution of such income in the form of dividend. The Amendment now provides level playing field for all the participants.
As for the tax neutrality, capital gains are exempt in the hands of individuals and the portion of capital gain distributed, as dividend is exempt for unit holders of mutual funds as well.
The feature of double taxation is common for banks, DFIs and companies as any dividend distributed out of the taxed CFS income is again taxed @ 10 percent in the hands of the recipient. In the context of individuals, double taxation may be mitigated by giving relief of tax on dividend income distributed to individual unit holders out of the CFS income.
I am all for development of mutual funds as a concept as long as they contribute to capital market activities. However, in all fairness the fund managers should earn their management fees on the basis of their expertise of investment rather than on the back of any unfair tax advantage.