New tax norms may be applicable on Mutual Funds: Report

Mutual funds (MFs) and alternative investment funds (AIFs) could be hit due to the applicability of the new tax collected at source (TCS) provision, according to a report by Business Standard.

The Finance Act, 2020 inserted a sub-section (1 H) in section 206C in the I-T Act which mandates that with effect from October 1, 2020, a seller will collect 0.1 per cent tax from the buyer if the sale consideration exceeds Rs 50 lakh or if aggregate sale value exceeded Rs 50 lakh in any previous year.

As all TCS provisions usually apply to MFs and AIFs that exceed a turnover of Rs 10 crore, MFs and AIFs may be considered as sellers under the new section, while investors purchasing them would become buyers.

And at the time of redemption of the taxes, MFs and AIFs would become buyers and investors, sellers, the report added.

“There is ambiguity about whether shares and securities, including units of mutual funds, could be regarded as ‘goods’, and whether mutual funds and AIFs could be regarded as sellers’. The CBDT has carved out an exception for listed securities traded through stock exchanges from TCS provisions. This seems to suggest that TCS provisions could otherwise extend to the sale of shares and securities,” Tushar Sachade, partner, PwC India, told the publication.

The Central Board of Direct Taxes (CBDT) had earlier clarified that the new introduced TCS provisions would not apply to transactions in securities and commodities which are traded through recognised stock exchanges or cleared and settled by recognised clearing corporation, including recognised stock exchanges or recognised clearing corporation located in International Financial Service Centre.

"On Section 206C(1H), the current circular clarifies on several puzzling aspects such as no adjustment for sales return, discount or GST component and applicability on receipts post-October 1, even if sale was made before that period," Nangia Andersen LLP Partner Sandeep Jhunjhunwala had clarified.

However, several ambiguous aspects need more clarity such as the applicability of TCS provisions on deemed exports within India to Special Economic Zone (SEZ) and Export Oriented Units, free of cost sales and warranty replacements, he said.

(With agency inputs)