The proposals are keeping in the interest of Investors, Distributors, Fund houses and all stakeholders
FinTech BizNews Service
Mumbai, July 12, 2024: Association of Mutual Funds in India regularly ahead of the Budget shares its proposal list with the FMO. AMFI has submitted a set of proposals for union budget - FY 2024-25 to the finance ministry. The proposals are keeping in the interest of Investors, Distributors, Fund houses and all stakeholders including industry’s contribution to nation building and country’s goal of reaching 5 trillion economy.
DIRECT TAX PROPOSALS
Request for Tax Concessions in Debt Mutual Funds
It is requested that Capital gains on redemption of Units of Debt oriented mutual funds held for more than 3 years should be taxed at the rate of 10% without indexation, as applicable in respect of debentures.
The resilience of the Indian market during the tumultuous past three years has surprised many experts worldwide. India’s aspirations of becoming the third largest economy of the world by 2027 and a developed country by 2047 need to be backed by a liquid, deep and well-functioning debt market. Private sector investments cannot be leveraged without such a debt market. Besides providing the borrowers with an alternative to bank credit, corporate bonds could lower the cost of long term finance. We need active participation by the retail investors in these markets which will not only help them in diversifying their investments but als help them in garnering inflation adjusted returns. It is against this backdrop, to encourage the retail investor participation in bond markets we request for an amendment to Finance Act, 2023 and consider the mutual fund units as “securities”, with long-term capital tax rate thereon should be according to / in line with the capital gains tax on bonds, debentures, SDL and G-secs etc.
Amend the definition of Equity Oriented Funds to include Fund of Funds investing in Equity Oriented Fund
It is requested that the definition of “Equity Oriented Funds” be revised to include investment in Fund of Funds schemes which invests a minimum of 90% of the corpus in units of Equity Oriented Mutual Fund Schemes, which in turn invest minimum 65% in equity shares of domestic companies listed on a recognised stock exchange. Consequently, Redemption of units in FOF schemes investing 90% or more in EOF should be subjected to the same capital gains tax, as applicable to sale of listed equity securities or units of Equity Oriented Mutual Fund Schemes.
It is also requested that CBDT may issue an appropriate notification, clarifying that where a mutual fund scheme (including Fund of Fund scheme) that invests more than 35% of the scheme’s AUM directly or indirectly (through investments in equity oriented/other mutual fund schemes (including ETFs)), in equity shares of domestic companies, such mutual fund schemes shall not be covered under section 50AA.
A carve out should be provided under the definition of Specified Mutual Fund under section 50AA of the Act to exclude mutual fund schemes investing in overseas mutual fund / ETFs from its ambit.
It is requested that the words “another fund” provided in the Explanation (a) to section 112A of the Income Tax Act should be replaced with the words “other funds” retrospectively, effective from the date of insertion of the Explanation.
All Mutual Funds should be allowed to launch pension-oriented MF schemes (MFLRS) with Uniform Tax Treatment as NPS
It is proposed that all SEBI registered Mutual Funds should be allowed to launch pension-oriented MF schemes, namely, ‘Mutual Fund Linked Retirement Scheme’ (MFLRS), with similar tax benefits as applicable to NPS under Sec. 80CCD (1) & 80CCD (1B) of Income Tax Act, 1961, with Exempt[1]Exempt-Exempt (E-E-E) status on the principle of similar tax treatment for similar products. ii. In other words, it is also proposed that the tax treatment for NPS and Retirement/Pension oriented schemes launched by Mutual Funds should be aligned by bringing the latter also under Sec. 80CCD of IT Act, 1961, considering that the characteristics of both are similar. iii. Where matching contributions are made by an employer, the total of Employer’s and Employee’s contributions should be taken into account for calculating tax benefits. iv. Contributions made by employer should be allowed as an eligible ‘Business Expense’ under Section 36(1) (iv a) of Income Tax Act,1961. v. Likewise, contributions made by the employer to MFLRS Schemes up to 10% of salary should be deductible in the hands of employee, as in respect of Section 80 CCD (2) of the Income Tax Act, 1961. vi. Withdrawals made from MFLRS should be exempt from income tax upto the limits specified for tax[1]exempt withdrawals from NPS as in section 10(12A) and 10(12B) of the Income Tax Act, 1961.
It is also requested that CBDT, in consultation with SEBI, should issue appropriate guidelines / notification in this regard as has been done in respect of ELSS, obviating the need for each Mutual Fund to apply individually to CBDT to notify its MFLRP as being eligible for tax benefit u/Sec.80CCD.
Mutual Fund Units should be notified as ‘Specified Long-Term Assets’ qualifying for exemption on LTCG under Sec. 54 EC
It is proposed that mutual fund units, wherein the underlying investments are made in specified infrastructure sub[1]sector (as may be specified by the Government of India), be included in the list of the specified long-term assets qualifying for tax exemption on Long[1]Term Capital Gains under Sec. 54EC. • The underlying investments of the mutual funds could made into ‘infrastructure assets’ as defined by RBI, in line with ‘Master List of Infrastructure sub-sectors’ notified by the Government of India. • The mutual fund units in the specified schemes can have a 3-year lock in period to be eligible for exemption under Sec. 54EC
Parity in Taxation on gold and Gold ETF Mutual Funds
It is proposed that Mutual Funds schemes and ETFs that have underlying investments in a commodity such as gold or silver, and Gold Fund of Funds that invests 90% or more in units of Gold ETFs should be taxed in accordance with capital gains taxation on the underlying commodity and not as debt / ‘non-equity’ instruments.
Need to further simplify Taxation provisions of offshore funds managed by Indian Portfolio Managers
Tax law should expressly provide that a fund manager in IFSC managing an offshore fund will not constitute a business connection of the offshore fund nor will the offshore fund be treated to be a tax resident of India on account of the fund manager being in IFSC.
Alternatively, some of the conditions under section 9A can be relaxed / amended for offshore funds being managed by fund managers based out of IFSC.
Remove the sunset clause for exemption of certain condition to eligible fund managers– Sec. 9A(8A)
It is recommended that the relaxation of certain specified conditions as per CBDT notification no 59/ 2022 dated 06 June 2022 read with section 9A(8A) is perpetually granted without any sunset clause.
Participation of eligible fund managers in the Fund – Sec. 9A(3)(c)
We recommend amending the proviso of section 9A(3)(c) to allow aggregate participation or investment by the eligible Fund manager in the Fund to up to one hundred crore rupees.
Ultimate beneficiary confirmation – Section 9A(3)(c) read with Rule 10V
We recommend amending the first proviso to the section 9(A)(3) of the Act as below:
(c) the aggregate participation or investment in the fund, directly or indirectly, by persons resident in India does not exceed five per cent of the corpus of the fund. (m) … Provided that the conditions specified in clauses (c), (e), (f) and (g) shall not apply in case of an investment fund set up by the Government or the Central Bank of a foreign State or a sovereign fund, or such other fund as the
Central Government may subject to conditions, if any, by notification* in the Official Gazette, specify in this behalf.” *CBDT is requested to issue a notification (similar to Notification no. 41/ 2020) as under: In exercise of the powers conferred by the proviso to sub[1]section (3) of section 9A of the Income-tax Act, 1961(43 of 1961), the Central Government hereby notifies that the conditions specified in clause (c) of the said sub-section shall not apply in case of an investment fund set up by a Category-I foreign portfolio investor registered under the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019, made under the Securities and Exchange Board of India Act, 1992 (15 of 1992).
Clarification on person acting on its behalf whose activities constitutes business connection in India – Section 9A(3)(l)
We recommend providing a clarification that the outsourcing of back office / support activities or appointment of custodian or broker would not constitute business connection by a person acting on behalf of the Fund as per section 9A(3)(l).
Extend the exemption provided for mutual funds under section 10(23D) to CDMDF
In case of Mutual Funds (MFs), the income of the MFs is taxable in the hands of its investors. Considering the role which CDMDF is proposed to play in the Indian debt markets, it would be vital to introduce a similar tax regime to a MF for CDMDF whereby income of CDMDF should be exempt and distributions be taxed in the hands of its investors. . In order to provide for a ‘unit level taxation ’ to CDMDF, section 10(23D) of the Act should be amended to the extent that the exemption provided for mutual funds is extended to CDMDF by deeming it as a MF for limited purposes of the Act.
Prescribe a uniform rate for deduction of Surcharge on TDS in respect of NRIs
It is proposed that the existing provisions w.r.t. Surcharge on TDS in respect of NRIs be amended and prescribe a uniform rate of Surcharge @10% on TDS in respect of dividend from mutual fund units u/S 56 to NRIs as well as the capital gains under Sec. 111A and Sec.112A arising upon redemption of mutual fund units in respect of NRIs, instead of slab-wise rate of Surcharge specified in Part II of the First Schedule to the Finance Act, 2020.
Increase in threshold limit of withholding tax (TDS) on Income distribution by Mutual Fund scheme
It is requested that the threshold limit for withholding tax (TDS) on income distribution (dividend) on mutual fund units be increased from Rs5,000 to Rs50,000 p.a.
Taxability of long-term capital gains under section 112A of the Act
It is requested that the LTCG on listed equity shares or units of equity-oriented fund schemes – (i) held for more than one year and upto three years be subjected to LTCG tax @ 10% (plus applicable surcharge and cess) on the capital gains exceeding ₹2 lakh in a financial year. (ii) held more than three years be exempted from Capital Gains tax years by suitable amendments to section 112A.
Amendment to ELSS Rule 3A to permit any amount to be invested in the scheme, instead of in multiples of Rs500
It is requested to amend Rule 3 of Equity Linked Savings Scheme, 2005, deleting the stipulation that investments in ELSS should be multiples of Rs500 and permit investments of any amount, subject to a minimum of Rs500.
Introduce Debt Linked Savings Scheme (DLSS) to help deepen the Indian Bond Market
• It is proposed to introduce “Debt Linked Savings Scheme” (DLSS) on the lines of Equity Linked Savings Scheme (ELSS) to channelize long-term savings of retail investors into higher credit rated debt instruments with appropriate tax benefits which will help in deepening the Indian Bond Market. • At least 80% of the funds collected under DLSS shall be invested in debentures and bonds of companies as permitted under SEBI Mutual Fund Regulations. Pending investment of the funds in the required manner, the funds may be allowed to be deployed in money market instruments and other liquid instruments as permitted under SEBI MF Regulations. • It is further proposed that the investments upto ₹1,50,000 under DLSS be eligible for tax benefit under a separate sub-Section and subject to a lock in period of 5 years (just like tax saving bank Fixed Deposits). • CBDT may issue appropriate guidelines / notification in this regard as done in respect of ELSS.
Relaxation to the mutual funds in case of deduction of TDS for inoperative PAN cases
It is requested that CBDT should clarify that mutual funds are not required to deduct TDS at higher rates in case PAN becomes inoperative if the PAN was valid when the investor was onboarded by the mutual fund AMCs.
INDIRECT TAX PROPOSALS
GST Compliances on Securities Lending & Borrowing
Request for relaxation to Mutual Funds for complying with various GST compliance on securities lending related transactions.
Reversal of Input Credit under section 17(2) towards Capital Gain on MF Units
Mutual Fund units should also be exempted like Fixed Deposits to avoid reversal of Input Tax Credit as per the predefined formula under GST regulations.
Sale of mutual fund units should not be regarded as Exempt service liable for reversal under Rule 42 of CGST Rules
An explanation was added to Rule 43 of the Central Goods and Services Tax Rules, 2017 vide notification 3/2018 – Central Tax dated 23 January 2018, to exclude interest on fixed deposits from the valuation of exempt service for the purpose of input tax credit reversal. We submit that fixed deposits and mutual funds are alternative investment options available to investors. It is recommended that a similar benefit of non-reversal of input tax credit available for interest on fixed deposits should be granted to the income earned from sale of mutual fund units. This will allow mutual fund industry to have a level playing field with other investment alternatives.
For large entities having a turnover of INR 10 crore or more, the payment of taxes should be allowed on a monthly basis while the return filing should be made quarterly.
There filing of Annual Returns. should be discontinued. Instead, annual 3B filing should be introduced in its place where the reconciliation could be provided between financials, ITC and monthly/quarterly returns filed.
It is recommended that refund of GST paid on capital goods should be allowed to companies which are exporting their services without payment of GST on such export of services.
There should be clear guidance to the taxpayer and field officers for documents/ details required for processing GST refund claims in order to promote ease of doing business.
At the time of making amendment, facility should be given to update/ amend the common fields once at Permanent Account Number (PAN) level for all registrations so that such amendments can be carried out once for all GST registrations. At the time of making amendment application itself an option for uploading supporting documents for any change in GST registration should be given, in order to provide ease of doing business.
Notice under Form DRC-01C should not be issued on the basis of difference of input tax credit available in Form GSTR 2B and input tax credit claimed in the GSTR 3B return of that month.
