Mutual fund association approaches Sebi for redressal.
Tax authorities have sent notices to several mutual fund houses, asking them to pay tax on income generated through pass through certificates (PTCs). The latter have sought help from the capital markets regulator.
PTCs are loans issued by banks which are bundled as securities and sold to financial institutions such as MFs. The interest paid to the issuer on these securities comes to the investor in the form of a fixed income. Long-term and medium-term bond funds of MF houses invest in these certificates.
Officials of MF fund houses say many have got demand notices from the Central Board of Direct Taxes (CBDT) on their PTC holding. The Association of Mutual Funds in India has taken up the matter with the Securities and Exchange Board of India (Sebi), they said.
“The demand notices were discussed with the Sebi chairman. We have sought support of the regulator to take up this matter with the government,” said the chief executive officer of a leading MF house, on condition of anonymity.
MF executives said they were not liable to pay taxes on income generated from PTCs, as any income received was exempt under section 10 (23D) of the Income Tax Act.
After the collapse of US investment bank Lehman Brothers in September 2008, several MF houses had to face redemptions from corporate clients due to their exposure to illiquid PTCs. Since then, the MF industry’s exposure to these instruments had sharply reduced.
