SEBI PROPOSAL AT FINMIN

India Inc may lose tax cover on MF investments
CAPITAL markets regulator Securities and Exchange Board of India (Sebi) wants the government to scrap tax benefits for corporates investing in mutual funds. The proposal, if accepted by the government , could deal a body blow to local asset management companies and other firms.
Sebi has also proposed that the securities transaction tax (STT), which is levied on transactions such as buying or selling of stocks, should be cut by one-third and that a uniform stamp duty be levied and collected by a central agency. These proposals have been forwarded to the finance ministry in the run-up to the budget for 2010, said a person with knowledge of the proposal.
The letter to the finance ministry said tax benefits to corporates investing in schemes of MFs may be withdrawn.
It is not just the capital markets watchdog that is uncomfortable with the present structure of the mutual fund industry, marked by an unhealthy dependence on short-term funds from corporates. This helps fund houses to grow their assets and thus boost valuations . The Reserve Bank of India, too, has been unhappy at the way banks have been parking their surpluses in mutual funds, which in turn finds its way back to banks. The central bank has nudged banks to restrict their investments in mutual funds.
Any move to either do away with the tax benefits or tweak the tax rates could hurt the local mutual fund industry whose growth is linked to the flow of funds from corporates. Over 50 % of the money for MF debt schemes comes from corporate treasuries and banks.
Sebis proposal is aimed at putting an end to the rampant misuse of debt schemes of mutual funds by corporates who park shortterm corporate treasury funds to enjoy a tax arbitrage. While income from their own treasury operations are taxed at the corporate tax rate of 33.99%, including surcharge and education cess, treasury investments in debt funds attract a dividend distribution tax (DDT) of 22.66% only for firms.