The Hindu Business Line : Dividend withholding tax — MFs confident of retaining corporate investments

ASSET management companies are unperturbed by the hike to 20 per cent of dividend withholding tax for corporate investments in debt funds. Corporate treasury investments in debt mutual funds would continue to be an attractive option, feel mutual fund houses.

Earlier, all investments in debt funds were taxed 12.5 per cent as dividend withholding tax. While, dividends are not taxed at the hands of the investor, the withholding tax is deducted at source.

Now, debt fund investments have been classified based on the nature of the investor. While retail investors and Hindu undivided families would continue to pay 12.5 per cent dividend withholding tax, corporate investments would be taxed 20 per cent.

Fund houses have many arguments to remain snug about corporate debt inflows. "Tax on dividend from mutual fund investments has been 20 per cent in the past with no significant impact on inflows. For most corporates these are treasury investments and are treated as stock-in-trade. The 20 per cent tax is half of what they would have to pay as income tax if these are left as cash reserves," said Mr Krishnamurthy Vijayan, Chief Executive Officer, JM Mutual Fund.

Also, if corporates tweak their investments marginally and move from `dividend option' offered by mutual funds to `growth option', the 20 per cent tax is not levied. Instead, all they would have to pay would be the 10 per cent short-term capital gains tax.

Mutual fund distributors are also confident that the 20 per cent tax would not affect corporate inflows. "It can be lived with," pointed out the sales head of a Mumbai-based institutional distribution house.

Echoing the fund houses view, Mr Jayesh Doshi, Assistant Vice-President, Gujarat Ambuja, said that while corporate investments into debt funds may marginally decrease, since the tax will be levied on dividends, it could be avoided by investing in growth options of funds.

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