BUDGET 1999-2000
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BUDGET 98-99
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Govt must review budget sops for the MF industry, say analysts

Muhammed Ash'ar Khan in New Delhi

One month after the Budget for 1999-2000 has been announced, views on the proposal to exempt mutual funds from taxes continue to crystallise.

Not everyone is happy with the measure. Analysts say mutual funds and investors stand to gain all right, but the government itself could end up the loser. The government must review the decision, they say.

Corporates and financial institutions, they argue, will try to raise money through mutual funds and avoid paying taxes, shrinking the exchequer.

Vineet Aggarwal of Acumen Finance says, "This is an important way in which tax can be avoided. For example, a financial institution can now route its entire funding through its own mutual fund. The FI can raise money through its MF at nine per cent or ten per cent. And the MF can invest the money with its parent institution, eventually earning a return of 13 per cent. So, at the end of the day, the parent will effectively pocket that three per cent. And government is not making any tax out of it."

Others believe the measure will boost the capital market and mark the return of the small investor. This will infuse more funds into the market -- and the revenue generated will be more than what will be lost in tax collection.

Gurbir Singh of Consortium Finance says, "The government will definitely lose out on some revenue on Unit Scheme 64 and on other mutual funds. But the mutual fund industry is at its infancy. So, the revenue loss is not going to be significant."

With the cut in the capital gains tax to ten per cent and the abolition of stamp duty on debt instruments traded through the depository route, the overall environment is very conducive for investments, he says.

Singh asserts that there will be a shift of capital from debt to equity, thanks to tax benefits offered to equity and mutual fund investors.

Aggarwal projects a scenario: a financial institution borrows from the market and offers bonds at the rate of 13 or 14 per cent. But the MF of the FI assures the investors a tax-free return of 12 per cent (roughly a taxable equivalent of 18 per cent, assuming the assessee is in the highest, 33 per cent tax bracket). "The small investor would rather prefer earning tax-free 12 per cent, or even ten per cent, from the MF to earning a taxable 13 per cent from the FI in the form of a bond-yield."

Singh says, "Looks like there will be a marked movement of the individual investor from stock markets to the MFs. We may not have one million direct investors in stock markets, but we will have 10 million investors routed through the mutual fund industry, as seen in the other countries."

The idea behind the shift, according to experts, is to resurrect the capital markets and make the climate conducive for disinvestment of public sector undertakings. The Indian mutual fund industry apart from US-64 is very small. Experts feel that now it will grow at a fast pace. There will be more private sector and corporate mutual funds.

Aggarwal says, "In cases where mutual funds have less than 50 per cent exposure in equities, mutual funds will have to pay 10 per cent dividend tax. Still, if investors put their money in these mutual funds, they will be better off than when they invest directly in the bonds of financial institutions.

"Even as the government tries to bring down interest rates, interest rates will go up, because financial institutions will not be able to gather money at the rates they presently offer to the investors."

The post-Budget bull run has brought about a surge in the net asset values of the major growth funds like the Kothari Pioneer's Infotech Fund, Birla Advantage Growth Fund and the Merrill Lynch's Equity Scheme. However, experts say, it is too early to say whether the tax-breaks for mutual funds will achieve their objective.

Budget 1999-2000

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