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Impact of budget 2011-12 on Mutual Fund Industry

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Amin Khan


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    Mutual Fund Industry of Pakistan

    Mutual Fund industry of Pakistan has shown significant growth in the past three years. The industry fund size has peaked to PkR 240 bn as of April 30, 2011, which had shrunk to PkR 138.8 bn in January 31, 2009 due to the stock market freeze in 2008.

    FY12 Budget highlights pertaining to Mutual Funds

    Recently some changes have been proposed in the FY12 budget announcements which are directly or indirectly related to the mutual fund industry. The highlighting features of the budget 2011-12 that would impact the mutual Fund Industry are given below:

    Tax rate on dividends received by a bank from its Asset Management Company is enhanced:
    In order to discourage the practice of arbitrage by banks for receiving ‘dividends’ from its Asset Management Companies (AMC), the rate of withholding tax on such return is proposed to be enhanced from 10% to 20%. The investment of banks in debt instruments net of expenses currently cost 35% corporate tax on the taxable income where as investment through their AMC costs 10% previously and now 20% is proposed. This encourages banks to invest in their own AMCs to manage tax expense. The changes may result in withdrawal of investment and the size of those AMCs might shrink that are backed by the banks.

    Cap on pension fund for tax credit is removed:
    The tax credit for the contribution to an approved pension fund was capped at PkR 500,000, which is proposed to be removed in the budget. The investment inflow might increase due to the fact that salaried and business class may claim greater amount in the form of tax shield.

    Tax credit for investment in Mutual Funds:
    The benefit of the tax credit rate on investment is proposed to be enhanced to 15% of the taxable income from the previous level of 10%. Simultaneously, the amount of maximum tax credit is proposed to be PkR 500,000 which was PkR 300,000 earlier. This would be quite favorable for the mutual fund investors to claim higher tax shield. However, on the other hand the holding period of investment in the funds is proposed to be increased to 36 months rather than 12 months and is applicable on the investments on or after 01 July 2011.

    Companies’ enlistment:
    The tax credit may enhance to 15% on listing of Companies on the stock exchange in Pakistan, prior to this it was 5% for a year. This would encourage funds to list themselves on stock exchanges of Pakistan and avail a higher tax shield.

    Withholding tax on profit from investment of Non-residents:
    Withholding tax on profit on debt instruments (like Term finance Certificate, Treasury Bills and Pakistan Investment Bonds) at 10% has been set as the full and final tax for encouraging investments made by overseas Pakistanis in Government Securities. Since the tax would be full and final, the non residents would not have to pay any further tax on investment.

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