Mutual funds (MFs) and alternative investment funds (AIFs) may come under the ambit of the new tax collected at source (TCS) regime, which came into effect on October 1. This could hit the funds as well as investors.
The Finance Act, 2020, has inserted a sub-section (1H) in section 206C, mandating a seller to deduct tax equal to 0.1 per cent of sale proceeds if the value of goods sold exceeds Rs 50 lakh in a financial year. The collection is to be made at the time of transaction.
Since TCS provisions apply to the sale of "goods" by a "seller" whose turnover exceeded Rs 10 crore in the preceding financial year, all MFs and AIFs may fall within its purview. In such case, MFs and AIFs selling units become sellers, whereas investors purchasing them, buyers. At the time of redemption, MFs and AIFs could be construed as buyers, while investors as sellers.
Last month, the Central Board of Direct Taxes (CBDT) issued a circular to clarify the applicability of section 206C (1H). It said the section won’t apply to transactions of securities and commodities traded through recognised stock exchanges, or cleared and settled by recognised clearing corporations.
“There is ambiguity about whether shares and securities, including units of mutual funds, could be regarded as ‘goods’, and whether mutual funds and AIFs could be regarded as sellers’. The CBDT has carved out an exception for listed securities traded through stock exchanges from TCS provisions. This seems to suggest that TCS provisions could otherwise extend to the sale of shares and securities,” said Tushar Sachade, partner, PwC India.
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