Mutual Funds seek clarification on amendment to Section 14(A)

Mukta Malhotra

Mumbai, April 16: THE mutual fund industry has sought a clarification on the recent amendment to the Section 14(A) in the Budget. According to the amendment, the expenditure in relation to income, which is tax-exempted, will not be allowed.

However, the industry has maintained that the income from units of UTI and mutual funds (MFs) are not completely exempted from income tax in the true sense of the term, since they do pay income distribution tax of 10 per cent. Therefore, the provision of new Section 14 A would not apply to income distribution by UTI and MFs.

The industry fears that the corporates, banks and FIs would not be able to claim deduction of interest and other business expenditure incurred in their normal course of business and may find investments in UTI, MFs completely unattractive. This would dissuade them from participating in the capital market through UTI, MFs, which is presently permissible.

Speaking to The Financial Express, Association of Mutual Funds of India (Amfi) chairman AP Kurian said, “There is a danger of corporates, bank and FIs resorting to large scale withdrawals of their existing investments in UTI, MFs resulting in redemption/repurchase pressure, which could adversely impact the mutual fund industry.”

Besides this, Amfi has also written to the finance ministry on a number of other issues. “We have also asked for clarification on Section 10 (33),” said Mr Kurian. Under the new provision to Section 10(33), by which if units of a mutual fund are transferred (capital other than through transactions in the secondary market), capital gains, if any, both short-term and long-term arising thereof, are exempted from tax.

Since transfer would also include repurchase/redemption of units by UTI or mutual funds, capital gains if any, both short-term or long-term, through such repurchase/redemption would also be tax exempted. CBDT and Courts of Law have always treated capital gains differently from normal revenue, and perhaps it was not intended to grant complete exemption to capital gains on transfer of units, whether in the secondary market or otherwise, said the letter.

Under Section 54(E)(C), the government recently introduced exemption of capital gain tax for Rural Electrification bonds. According to Amfi, this should also include debt schemes of mutual funds. “The other suggestion is to also include equity schemes of mutual funds for exemption of capital gains tax under the new section 54(E)(D) for investing capital gains in the primary issue,” said Mr Kurian.