Rationalisation of Tax treatment of Infrastructure Debt Funds of Mutual Funds and Infrastructure Debt Funds of NBFCs AMFI BUDGET PROPOSALS 2018-19

Rationalisation of Tax treatment of Infrastructure Debt Funds of Mutual Funds and Infrastructure Debt Funds of NBFCs

AMFI  BUDGET PROPOSALS 2018-19

AMFI-  Association of Mutual Funds in India

BUDGET PROPOSALS FOR FY 2018-19

Rationalisation of Tax treatment of Infrastructure Debt Funds of Mutual Funds and Infrastructure Debt Funds of NBFCs

Background

•                    Currently, Mutual Funds as well as Non-Banking Finance Companies (NBFCs) are permitted to set up Infrastructure Debt Funds (IDFs) under the purview of respective Regulations of SEBI and RBI.

•                    • The income of a Mutual Fund is exempt under section 10(23D) of Income Tax Act, 1961. Similarly, the income of an IDF set up as an NBFC is also exempt, but under section 10(47).

•                    • The income from NBFC-IDF is in the form of interest, whereas the income from MF-IDF is in the form of dividend.

•                    • The interest paid by NBFC-IDF attracts TDS @10% for Resident Investors, whereas the dividend distributed by MF-IDF is subject to Dividend Distribution Tax (DDT) under section 115R of the IT Act @ 25% for Individuals & HUFs and 30% for others (plus applicable surcharge)

•                    • The levy of DDT adversely impacts the net returns from MF-IDF, due to the disparity in the tax treatment of income earned from IDFs of NBFCs vis-à-vis IDFs of MFs.

Proposal

It is recommended that Tax-exempt institutional investors in Infrastructure Debt Funds of Mutual Funds be exempt from Dividend Distribution Tax under section 115R of the Income Tax Act.

Justification

•                    In its “Long Term Policy for Mutual Funds”, SEBI has emphasised the principle that similar products should get similar tax treatment, and the need to eliminate tax arbitrage that results in launching similar products under supervision of different regulators.

•                    • The investors in IDF of an NBFC and IDF of a Mutual Fund are primarily the same and mostly Tax-Exempt Institutional Investors such as, EPFO, NPS, Insurance Companies, Section 25 companies etc. or pass through vehicles who invest on behalf of their investors /contributors /policyholders .

•                    • In order to attract and encourage investment through Mutual Fund-IDFs, it is necessary to bring parity in the treatment of income received under both the routes.

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