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Bank income from mutual fund debt to be taxed at corporate rate

KARACHI (June 11 2003) : The government has imposed tax on income received by banks from debt or fixed income mutual funds from next financial year.

The Finance Bill for 2003-04 has added the following new sub-section related to proceeds received by a bank or non-banking finance company (NBFC).

The document states in section 18, after sub-section (2) the following new sub-section shall be inserted.

This is as follows:
<br> “Any amount received by a banking company or a non-banking finance companies, where such amount represents distribution by a mutual fund out of its income from profit on debt, shall be chargeable to tax under the head 'Income from Business' and not under the head 'Income from other sources'.”

According to an analyst, the Finance Bill 2003 specifically mentioned that distribution by a mutual fund out of its income from profit on debt (not equity) as income from business for banks will be liable for tax.

He believes that this imposition will have a meagre impact on after-tax earnings of key banks, considering their low exposure in such mutual funds.

Tanvir Abid, head of research at Jahangir Siddiqui & Co, said that the dividend income received by banks or NBFC from the debt income of mutual funds will be considered as taxable for the final tax liability.

This applies to dividends received from income funds and the debt portion of balanced funds that invest in both income and equity.

Previously, the dividend income of banks from such funds was subject to a 5 percent withholding tax, which was the final tax liability.

Henceforth, as these proceeds will be classified under the head of 'Income from Business' therefore, now the income will be taxed at the applicable corporate tax rate.

The rate on banks for the new fiscal year is 44 percent, down from 47 percent.

He said that recently there has been a trend towards the establishment of several fixed income open-ended mutual funds, wherein financial institutions “place” their debt instruments.

This move enabled them to take advantage of the lower tax rate on dividends as opposed to the taxes they would be incurring if the fixed income instruments directly generated income on their own books.

By eliminating the advantage, the Finance Bill 2003-04 amendment may also dampen the establishment of such debt mutual funds.

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