The Hindu Business Line : MFs ask for REIT, tax sops for debt-oriented funds in Budget

Mutual fund industry expects the Union Budget to contain several key initiatives including permission for fund houses to float Real Estate Investment Trusts (REIT) and derivative based commodity funds, tax sops for debt-oriented funds and, pension funds being allowed to invest in mutual funds.

Fund houses also expect the Finance Minister, Mr P. Chidambaram, to continue the long-term capital gains structure in the existing form, but hope that the Budget would propose to amend the IT Act, so that investors of equity-based fund of funds (FOF) are not subject to dividend distribution tax and long term capital gains tax.

"As of now, the Income Tax Act does not differentiate equity based FOF from other forms of FOF. As a result, investors of even equity-based FOF are subject to dividend distribution tax and long-term capital gains tax. We expect an amendment in the IT Act, distinguishing FOF in equity from other FOF," said Mr Sandesh Kirkire, CEO of Kotak Mutual Fund.

Adds Mr Sanjay Sachdev, MD & CEO of Principal PNB AMC: "Currently there is lack of clarity with regard to FOFs and closed-ended funds, since current regulations that govern equity mutual funds do not extend benefits to these categories."

Mr Pankaj Razdan, Managing Director, Prudential-ICICI AMC, said he expects the Budget to give added incentives for investors who stay invested in the capital market over a long period of time. "Today an investor with a two-year investment horizon into equities enjoys the same tax incentive as one with a 20-year investment horizon. We believe that going forward investors should be given added incentive to stay invested in the capital markets and other investment instruments over long periods of time," Mr Razdan said.

Mr Ajay Bagga, CEO of Lotus India AMC, expects the Budget to sanction new products such as commodity-based funds, REITs, gold-based exchange traded funds. Further, he said he was hopeful that the Budget removes the anomaly with regard to double incidence of securities transaction tax (STT) on mutual fund units and the underlying share purchases. "The anomaly should be removed this time around," Mr Bagga, whose AMC, Lotus India is awaiting SEBI nod to launch operations, said.

According to Mr T.P. Raman, Managing Director of Sundaram Mutual, the Budget should bring an end to dividend distribution tax on income funds. "This should be either diluted or abolished," he said.

Another suggestion by the mutual fund industry relates to more freedom for investments in overseas listed companies. Says Mr Sachdev of Principal PNB: "We hope that there is a re-look at the guidelines which will enable Indian investors to invest in global equity markets with a wider choice of stocks to permit greater diversification while giving the investors the convenience of dealing with an Indian mutual fund."

Points out Mr Kirkire of Kotak MF: "Mutual funds can invest only in those companies abroad, which have at least 10 per cent stake in listed companies in India. This criterion restricts the universe of companies to about 50. The fund industry could better serve Indian investors, if the norms were more conducive."

The fund houses also wants the Budget to allow provident fund trusts to invest in mutual funds.