New tax norms applicable to mutual funds

Finance Act, 2020 introduced a sub-section (1H) in section 206C in the Income Tax Act, which mandates a seller to collect 0.1 per cent tax from the buyer if the sale consideration exceeds Rs 50 lakh or the aggregate sale value exceeding Rs 50 lakh in the previous year. This mandate came into effect on October 01, 2020.

Typically, tax collected at source (TCS) provisions applies to mutual funds and Alternative Investment Funds (AIF) that exceed a turnover of Rs 10 crore. Having said, according to the new section, mutual funds and AIFs may be considered as sellers, whereas investors might be considered as buyers. And during redemptions, mutual funds and AIFs would become buyers and investors will be the sellers.

Many experts believe that there is a lot of vagueness about whether shares and securities, including units of mutual funds, could be regarded as ‘goods’, and mutual funds and AIFs could be considered as sellers. However, the Central Board of Direct Taxes (CBDT) has considered listed securities that are traded through stock exchanges as an exception for TCS provisions.

CBDT had elucidated that the newly announced TCS provisions would not be applicable to the transactions in securities and commodities which are traded through recognised stock exchanges. Further, it is also not applicable to securities and commodities transactions that are cleared and settled by recognised clearing corporations, including recognised stock exchanges or clearing corporations located in International Financial Service Centre.