Marginal relief to MFs; new tax rate effective from Jul 10

In a small relief to the mutual fund industry, Finance Minister Arun Jaitley today announced that the increased tax rate of 20 per cent on debt MFs will not apply on units sold between April 1 and July 10.

Units of the debt-oriented MFs sold after July 10 will, however, attract 20 per cent capital gains tax as against 10 per cent earlier.

"I propose to move a government amendment today in the Finance Bill itself that the new tax regime will not be applicable to transaction of sale of units (of debt MFs) which have taken between April 1 and July 10 this year," the Minister said.

Replying to a discussion on the Finance Bill in the Lok Sabha, Jaitley said that he had decided to end concessional rate of taxation of 10 per cent on debt mutual funds in his budget as it was being mostly used by corproates for "abritrage".

During the debate, a number of members had raised the issue of new tax regime on MFs saying that on one hand the government was opposed to retrospective taxation and on the other hand it imposed it on debt mutual funds. The Finance Bill was later passed by Lok Sabha, completing the budgetary exercise in the lower house.

In his budget proposals, unveiled on July 10, Jaitley had proposed raising long-term capital gains tax on debt-oriented mutual funds to 20 per cent from 10 per cent, to bring parity with banks and other debt instruments.

He also proposed increasing the period of holding in respect of long-term debt funds units from 12 months to 36 months. The mutual fund industry said the concession will provide only a "marginal relief and will not be of much help to the sector.

The Finance Minister also gave some relief for those who pay penalty for late filing income tax returns.

Jaitley said: "For late filing of returns there is a provision which has become onerous as huge penalty (is levied) per day and there are no power of waiver itself.

"So if somebody says it's filed after a year, then per day the penalty used to become extremely exorbitant. So some discretion is given to the CBDT with regard to that penalty where cases of late filing of returns were involved. The penalty as such will remain."

Replying to the debate on Finance Bill, he also announced expanding the scope of Settlement Commission to "include cases where proceedings have been initiated for reassessment ... and proceedings which are pending for making a fresh assessment in pursuance of an order of a tribunal or a commissioner for setting aside or cancelling the assessment itself".

In order to reduce mounting tax litigation, Jaitley said he proposed providing for more benches of Advance Ruling to deal with transfer pricing disputes.

Seeking to boost the wind energy sector, he announced extension of the accelerated depreciation benefit to the sector as demanded by members.

As regards the MF industry, under the earlier norms the capital gains arising on transfer of units held for more than a year was taxed at a concessional rate of 10 per cent, whereas direct investments in banks and other debt instruments attract a higher rate of tax. This allows tax arbitrage opportunity.

"With a view to remove this tax arbitrage, I propose to increase the rate of tax on long term capital gains from 10 per cent to 20 per cent on transfer of units of such (mutual funds other than equity oriented funds) funds," Jaitley had said in his budget speech.

Commenting on the development, Axis Mutual Fund Managing Director and CEO Chandresh Nigam said: "We welcome the step but it's a partial relief."

LIC Nomura MF Senior Fund Manager Kilol Pandya termed it a marginal relief saying it "is not going to help the industry incrementally".