Indian mutual fund industry heaved a sigh of relief after finance minister Arun Jaitley proposed to change tax treatment on mergers of schemes. This move could lead to further consolidation in the 12-lakh-crore mutual fund industry as capital gains tax will not levied on scheme mergers. In CY14, mutual fund industry saw the merger of 81 schemes.
Industry players say more schemes may be consolidated going forward. Finance minister in its Budget speech on Saturday said, “It is proposed to amend the provisions of the Income-tax Act so as to provide tax neutrality on transfer of units of a scheme of a mutual fund under the process of consolidation of schemes of Mutual Funds as per Sebi Regulations, 1996.”
In 2014, Kotak Asset Management Company (AMC) had acquired PineBridge Investment AMC, while Birla Sun Life AMC had bought the schemes of ING Investments Management. In the earlier regime if one scheme, say ABC ,is merged into XYZ, investors holding units of ABC scheme had to pay capital gains tax (if units were held for less than one year in case of equity and three year for debt funds). According to the new proposal, if one scheme is merged into another, investors need not pay capital gains tax.
A Balasubramanian, CEO at Birla Sun Life AMC says, “It is a very good move as it will allow more schemes to merge since investors no longer need to pay capital gains tax.” Since the start of 2015, we have seen around 15 schemes, from Tata AMC and Kotak AMC, being merged.
Typically, schemes are merged when one fund house buys another and when fund houses feel their existing schemes have similar objectives. In the past there were instances when funds were merged either because they were too small or were performing poorly. “I think this is an investor friendly step and will lead to further consolidation. There are a series of schemes in the industry with similar investment objectives which can be consolidated,” said Jimmy Patel, CEO at Quantum AMC.
However, there was disappointment for distributors in the Union Budget as the finance minister withdrew the service tax exemption given to the mutual fund distributors, which now stands at 14%. The Budget has also increased the surcharge from 10% to 12% which would result in dividend distribution tax (DDT) going up and would have small impact on investors return.