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Impact of Budget 2012-13 on Mutual Fund Industry of Pakistan

Mutual Fund Industry Budget 2012-13 Impact of Budget Capital gain tax Provident funds investing Tax rate on dividends Tax credit limit FY13 Budget Mutual Fund Industry of Pakistan

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Amin Khan


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    Impact of Budget 2012-13 on Mutual Fund Industry of Pakistan
    Mutual Fund Industry of Pakistan
    The mutual fund industry has witnessed a sizable growth in the recent times where the assets under management surged to a record level of PkR 379 bn in April 2012 after rising by 14.22% MoM or PkR 47.198 bn in a month. The open ended mutual funds constitutes 92% of the total fund size while, pension funds and closed end funds contributes 7% and 1% to the fund size as at April 30, 2012.
    Major growth was observed in conventional Money Market and Income category funds registering a growth of 38.70% MoM or PkR 146.65 bn and 22.91% or PkR 86.82% MoM respectively. The mutual fund industry managed to attract more funds from the investors’ community, reflecting improved confidence and better returns from this industry.

    FY13 Budget highlights pertaining to Mutual Funds
    Recently, some changes have been proposed in the FY13 budget announcements which are directly or indirectly related to the mutual fund industry. The highlighting features of the budget 2012-13 that would impact the mutual Fund Industry are given below:

    Tax credit limit enhanced on Investments:
    The benefit of availing tax credit through investments in shares, mutual funds and insurance is proposed to enhance to 20% of the taxable income from the previous level of 15%. Simultaneously, the limit of maximum tax credit is also enhanced to PkR 1,000,000 of yearly taxable income which was PkR 500,000 earlier. The enhancement in tax credit limit would be favorable for mutual fund by would encourage investors to invest more in funds to claim higher tax shield while also earning return on investment. In addition to this, the holding period of investment in funds has also been reduced to 24 months from 36 months earlier in order to claim tax credit which is also a relief provided to the investors.

    Tax rate on dividends received by banks from its AMC:
    In order to discourage the practice of tax arbitrage by banks, it is proposed that dividends received from money market funds and income funds are to be taxed to banks progressively over a period of two years where for the tax year 2013, it is proposed to be charged at the rate of 25% and for tax year 2014 and onwards it is to be charged at 35% where as the dividend received from other sources will be charged 10%. Currently, dividend income received by banks from its assets management company is taxed at the rate of 20%. This measure is taken to discourage banks to be able to make risk free gains arising out of tax disparity by investing in income and money market funds of AMCs. However, this may result in withdrawal of investment from AMCs by banks due to which the size of AMCs may shrink.

    Provident funds investing in approved pension funds proposed tax free:
    The balance amount of provident funds invested in approved pension funds should be marked separately by pension fund managers and any withdrawal from such funds are proposed to be exempted from tax. This encourages provident funds to invest further in pension/retirement schemes.

    Payment of monthly installment:
    It is proposed that an exemption on the payment of monthly installment from an income payment plan invested, out of the accumulated balance of the individual pension account, is exempted on the condition that the accumulated balance is invested for a period of 10 years.

    Dividend Distribution of Pension Funds:
    If a pension fund has distributed its 90% of income as dividends than the income from such funds is exempted from withholding tax. Previously, the exemption certificate was required to reclaim tax benefit but now such requirements have been waived.

    Capital gain tax on disposal of securities:
    The collective investment schemes, modarabas, pension funds, income payment plans, REIT schemes, private equity and venture capital funds, approved superannuation funds, recognized provident fund and approved gratuity funds are proposed to be exempted from tax on capital gains on disposal of securities. This is done to encourage investments by the aforementioned schemes which may be directed to mutual fund industry.
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    Some impacts are useful for the monetry policy of Pakistan and some are not best.

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