Centre’s decision to hike dividend tax hits income schemes - Views on News from Equitymaster

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  • Mar 10, 2000 - Centre’s decision to hike dividend tax hits income schemes

Centre’s decision to hike dividend tax hits income schemes

Mar 10, 2000

The government's decision to hike the dividend tax to 20% has taken its toll on the income schemes of mutual funds that are not exempt from such a tax (schemes that invest over 51% of their corpus in equities are exempt from such a tax). Industry sources have pointed out that the income schemes are witnessing a rise in redemption even as fresh inflows have reduced. This has led to some funds offloading stock in the market to meet liquidity requirements.

The Unit Trust of India, the largest domestic mutual fund, is reported to be considering novel ways of getting around this dividend tax. Among the measures is a proposal to do away with dividend payments. Instead the fund proposes to generate income for unit holders by buying back a portion of their units from time to time (in lieu of dividend).

The centre’s decision to hike the dividend tax and abolish sections 54EA and 54EB in their present forms has expectedly sounded the death knell for the domestic mutual fund sector. That the abolition of section 54 was not desirable has been aptly stated by a respected industrialist who reasoned that the National Highways Authority of India (NHAI) has over Rs 50 bn in funds of which only Rs 4 bn have been disbursed. Therefore the need to direct more funds into these bodies is unwarranted. The NHAI is one of two bodies whose debt instruments are now qualify for tax benefits under section 54.

The recent provisions have also affected sentiment in the stock markets, which have rightly anticipated selling pressure from the mutual fund sector. These proposals of the government have made the mutual fund sector vulnerable to increasing redemption pressure (income funds) and a slowdown in fresh inflows (income and equity funds). The government needs to take corrective measures at the earliest.

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