The Government's 'Task Forces on Direct and Indirect Taxes', chaired by Dr. Vijay Kelkar, has recommended sweeping changes that will impact mutual fund investments. The biggest change is that short-term capital gains and interest income that funds generate will now be taxed in the hands of the funds themselves. Coupled with complete elimination of long-term capital gains tax on equity investments, this is likely to bring about a substantial change in the way mutual funds manage equity investments.
While the exact impact of these recommendations depend on the final shape in which these recommendations are implemented by the government, it does appear likely that Kelkar report will have a far reaching impact on the mutual fund investor.
Here is the relevant section of the report:
1. In the light of the problems associated with the existing system of taxation of investment fund and the package for corporate tax reform, we recommend the following:-
2. The income of the mutual fund derived from short-term capital gains and interest should be taxed at a flat rate in the hands of the mutual fund.
3. Since most investors in units are generally smaller taxpayers, we recommend that the rate of tax should be the minimum marginal rate of personal income tax i.e. 20 per cent.
4. With a view to overcoming double taxation, the dividends received by the unit holders should be fully exempted since the distributable surplus would have suffered the full burden of the tax.
5. The short-term capital gain arising to the investor from sale of units of investment funds should be taxed at his level at the personal marginal rate of tax.
6. The long-term capital gain arising to the investor from sale of units of mutual fund should be exempt from income tax.
7. The tax treatment of mutual funds and their investors should also be extended to venture capital funds, private equity funds and hedge funds. However, the tax rate for these funds should be 30 per cent since their investors are likely to be those in the highest tax slab.
8. All funds must necessarily obtain the PAN of the investor and the Databases about every payment made by the fund manager back to the investor, tagged with PAN, should be furnished to the tax authorities as a information return.
The chapter of the report that is relevant to mutual funds can be downloaded from https://www.valueresearchonline.com/kelkar-direct-tax-chap7.pdf
The complete report is available at http://finmin.nic.in/kelkar/direct_taxes.htm