Amfi seeks tax rationalisation

The Association of Mutual Fund of India (Amfi) has made a proposal to the government for harmonisation of taxes on mutual funds and a reduction in dividend distribution tax on debt funds.

"We have proposed that the dividend distribution tax on debt funds be reduced considering that the returns from debt funds have come down substantially and the current tax structure makes these funds even more unattractive" said A P Kurian, chairman, Amfi.

Currently, dividends from open-end equity mutual funds are completely exempt in the hands of the investors but the same does not apply to their closed-end cousins. Similarly, fund of funds which invest predominantly in equity mutual funds also do not enjoy this exemption.

Amfi has thus recommended that this anomoly in the tax structure be removed by making dividends from both equity based funds-of-funds and closed-end equity schemes tax-free.

Apart from this, the industry has requested that the mutual fund companies be provided an equal opportunity to manage pension products whenever the sector is opened up for private participation, Kurian added.

The industry, however, seems to be hoping against hope for a further relaxation on the dividend distribution tax. Already several instance of dividend stripping have come to light where preferred corporate investors are allowed to take advantage of the tax arbitrague between fixed deposits and debt funds.

At present, the dividend distribution tax on debt funds is 22 per cent and for retail investors it is 12 per cent. But interest on bank deposits are taxed at the marginal income tax rate which can be over 30 per cent including surcharge for the highest income slab. Despite a lower tax rate, debt funds have fallen out of favour owing to diminishing returns.