AMFI proposes elaborate 17-point budget pitch to enhance Mutual Fund industry

Association of Mutual Funds in India (AMFI) has proposed an elaborate 17-point charter of Budget Memorandum, suggesting introduction of Debt Linked Savings Schemes (DLSS) on the lines of ELSS, recognising MFs as specified long term assets, bringing ULIPs and Equity MF schemes on par, lowering holding period in Gold, Commodity ETFs to one year from existing three years, allowing DDT exemption for EPFO, NPS, Insurance companies investing in MF schemes and giving pass-through status for Income Tax Purpose to those Category III AIFs, who making 65% investments in listed equities.

There are 17 points charter in the proposal to the finance ministry for changes in the Union Budget 2020-21. Below are the some of the key points.

1)  AMFI has proposed that the investments up to INR 1,50,000 under DLSS be eligible for tax benefit subject to a lock in period of 5 years (just like tax saving Bank Fixed Deposits). If large borrowers are persuaded to raise funds from the market (eg. Govt investment in the infrastructure), it will increase bond issuance over time and attract more investors, which will also generate liquidity in the secondary market. DLSS will help small investors participate in bond markets at low costs and at a lower risk as compared to equity markets. This will also bring debt oriented mutual funds on par with tax saving bank fixed deposits, where deduction is available under Section 80C.

2)  AMFI has proposed that, Mutual Fund Units should be notified as ‘Specified Long-Term Assets’ qualifying for exemption on Long-Term Capital Gains. In order to channelize at least some of the gains from sale of immovable property into capital markets, it is recommended to broaden the list of the specified long-term assets under Sec. 54 EC by including mutual fund units with a lock in period of three years.

3)  AMFI has proposed uniform tax treatment in respect of investments in Mutual Funds Units and ULIPs of Life Insurance companies. In its “Long Term Policy for Mutual Funds”, SEBI has emphasised the principle that similar products should get similar tax treatment, under supervision of different regulators. Thus, there is need to have uniformity in the tax treatment for “Switch” transaction to have a level playing field.

4)  Uniform Tax Treatment for Retirement / Pension Schemes of Mutual Funds and NPS
NPS provides an avenue, albeit with limited reach. Mutual funds could provide an appropriate alternative, given the maturity of the mutual fund industry in India and their distribution reach. This could be better achieved by aligning the tax. A majority of NPS subscribers are from government and organized sector. Hence, MFLRP could target individuals who are not subscribers to NPS especially those from the unorganized sector and provide them an option to save for the long term, coupled with tax benefits. 

5)  In order to make Gold and Commodity ETFs more attractive, it is proposed to lower the holding period for LTCG purposes from 3 years to 1 year, as in the case of listed debt securities. From liquidity perspective, Gold ETFs are superior as compared to SGB, as Gold ETFs provide continuous liquidity to investors. Gold ETFs & Commodity ETFs are globally popular with over $100 billion in AUMs. A favourable tax regime would go a long way in making ETFs popular among retail investors.

6)  AMFI has proposed lowering of Dividend Distribution Tax on Debt Mutual Fund Schemes at least brought at par with the Corporate Tax rate of 22% (as against the current rate of 25% for individual and  30% for Corporates, plus applicable Surcharge + Cess). Lesser DDT will attract fresh flows into Debt mutual fund schemes especially from retirees and can help inflow stable money into bond market through mutual fund route. It is only fair and just to bring parity in the DDT rate in line with the Corporate Tax rate of   22%.

7)  AMFI has proposed Exemption from Dividend Distribution Tax (DDT) in respect of Tax-exempt Institutional Investors like EPFO, NPS, Insurance Companies, non-profit Section 8 companies who invest on behalf of their investors / contributors/ policyholders in Mutual Funds schemes or Infrastructure Debt Funds of Mutual Funds. The exemption from Dividend Distribution Tax would be under section 115R of the Income Tax Act. While waiving DDT in respect of Tax-exempt institutional investors would not affect the Government’s revenue, it would eliminate arbitrage between incomes earned from MFs / MFIDFs vis-à-vis other interest-bearing financial instruments.

8)  AMFI has requested clarity in respect of creation of segregated portfolio in mutual fund schemes, on the capital gains tax treatment upon the sale of Units with regard to the treatment of the Units allotted consequent on segregation of portfolio. Creation of segregated portfolio is driven by the trustees to protect the interest of the investors, under certain adverse circumstances of rating downgrade / credit default, in accordance with SEBI guidelines. In the case of side-pocketing, the number of units remains unchanged — only the NAV of the units of the Main scheme reduces to the extent of the portfolio segregated from the main portfolio.

9)  AMFI has proposed to accord pass-through status to Category III AIFs for Income Tax Purposes, as done in respect of Category I & II AIFs.

10) AMFI has proposed that the threshold Limit in Equity Oriented Mutual Fund schemes be restored to 50%. Reducing the threshold limit of equities from 65% to 50% for being regarded as ‘equity-oriented fund’ would encourage more investors with lower risk appetite to invest in equity mutual funds.

11) AMFI has proposed that the definition of “Equity Oriented Funds” (EOF), be revised to include investment in Fund of Funds (FOF) schemes which invest predominantly in units of Equity Oriented Mutual Fund Schemes.