The capital market package in the Budget is expected to include a tax sop for mutual funds and measures to check corporates from parking their investible surplus with the funds for reducing their tax liability.
The finance ministry may also impose a transaction tax on the sale and purchase of shares to replace the long-term capital gains tax.
Sources in the government said, the mutual fund industry had also asked the finance ministry to give tax exemption under Section 88 of the Income Tax Act, 1961, for investment in these funds. The proposal has been vetted by the Department of Economic Affairs and has been forwarded to the income-tax department.
The set of benefits to mutual funds will also, in turn, help the industry gain a stronger foothold among the investors.
But the tax sops for the mutual funds industry may come with a rider that the industry will allow professional trustees who would have no linkage with the running of the fund. This has been recommended in a study made by the Asian Development Bank on the sector.
The government has been concerned that a large number of companies park their surplus cash in various schemes of mutual funds tailor-made for them. The companies are therefore able to escape paying corporate tax at the rate of 36.75 per cent on these funds, and instead, have to cough up a much lower tax rate of 12.5 per cent.
The sources said the government was thinking of giving a dividend tax-break to the mutual funds, provided they are used for ploughing back for fresh investment.
The finance ministry is also learnt to be working on a share transactions tax to replace the capital gains tax regime. The ministry is hopeful that such a levy would compensate the loss from the withdrawal of a capital gains tax.
The transaction tax may be levied on the brokers, at a specific percentage of each transaction.
Under the current income-tax regime, profits and gains arising from the transfer of short-term capital asset are treated as short-term capital gain. This is included in the total income of the taxpayer for taxation at the rates applicable to him.
But long-term capital gains are taxed at a concessional rate of 20 per cent.
However, if the asset is a listed security or units, the rate of tax is 10 per cent of the gains computed without inflation indexation. Foreign institutional investors have asked for deleting the long-term capital gains tax.
But the Kelkar Report on Direct Taxes had noted that while doing away with the concessional treatment, there should be an exemption for such investment if used for houses or in bonds of the National Highway Authority of India, till the completion of the Golden Quadrilateral and the National Highway Development Project.
The domestic mutual fund industry, with about 22 million investors, is weighed heavily in favour of debt-linked funds.
Of the total Rs 1,35,000 crore (Rs 1,350 billion) managed by the industry, less than a quarter is invested in equity-linked funds.
The rest is invested in debentures and other debt papers issued by the government and the companies. Industry analysts say a change in the tax regime is the surest way to ensure that more investors go in for equity-based funds.
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