AMFI asks finance ministry to treat mergers of schemes on par with corporate mergers to save investors from having to pay tax
Mumbai: AMFI has asked the ministry of finance to align tax treatment of merger of mutual fund schemes with that of corporate mergers. Acceptance of this demand would mean investors in a scheme that gets merged with another will not have to pay capital gains tax.
In a letter to the ministry, AMFI has sought acceptance of its demand in the 2011-12 budget that would be presented in the last week of this month. The summer session of Parliament begins on February 21.
“When two schemes are merged, the scheme that gets merged is treated as the transferred scheme. We want any merger of schemes to be treated at par with the merger of two companies. It’s a major issue that we will have to face. We have already approached the ministry of finance on this,” said V Ramesh, Deputy Chief Executive, AMFI.
In a corporate merger, there is no tax liability that arises when the surviving company issues new shares to the shareholders of the company that is absorbed. For e.g., if company A is merged with company B and new shares of company B are issued to the shareholders of company A, it is not treated as a sale and purchase. Therefore, there is no capital gains tax liability involved.
In mutual funds, if scheme C is merged with scheme D, then it is treated as redemption by unit-holders of scheme C and issue of units of scheme D to them is considered as purchase of new units. The investors of scheme C are liable for capital gains tax as it is considered as withdrawal.
There is no long-term capital gains tax on investments in equity schemes if investments are held for more than a year. In the case of debt schemes, investors have to pay both short-term as well as long-term capital gains tax on redemption.
“The scheme which is being merged for all technical reasons is treated as redemption. The tax would depend on the tenure of investment holdings,” said Vijay Mantri, Managing Director and CEO, Pramerica Mutual Fund.
Applicability of capital gains tax is an issue as many schemes are expected to be merged with schemes having similar investment objectives.
SEBI through a circular issued on October 22, 2010 had stated that two schemes should be merged if the fundamental attributes of surviving scheme is not tinkered with. Fund house are allowed to merge schemes keeping investors’ interests in mind and after getting a formal approval by the board members of AMCs and trustees. Fund houses then file a proposal with SEBI seeking such a merger. After getting an approval, AMCs give an exit option to investors.
Cafemutual had reported on December 22, 2010 that scheme mergers will gain momentum as fund houses seek to consolidate their smaller schemes with larger ones. Currently, there are 296 schemes having AUM of Rs 500 crore or less. According to fund officials, a majority of these schemes are set to be consolidated with larger ones.
