The mutual fund industry, designed to benefit small investors, has been growing slowly at five per cent for the last ten years. But in the recent years it blossomed into an industry with a deposit of Rs230 billion.
When the industry was looking forward to brighter prospects, a tax of 35 per cent was levied on its income earned from the use of CSF funds. In that way, the mutual fund is being treated like other share transactions drawing on CSF funds which have to pay 35 per cent of the profits as tax. The mutual funds have so far been treated differently but, now, if they draw on the CSF funds, they pay over one third of the profits as tax.
Mr Mohammed Ali, chief executive of the UBL fund management, says that mutual funds are a pass through item. The profit goes to the investor and he also endures any losses. Ali pleads for its exceptional treatment in view of the fact that mutual funds are in their infancy. The 35 per cent tax on mutual funds obtained with the assistance of CSF funds is the same as the corporate rate of taxation.
Now, there are three tiers of taxes on the mutual fund profits. The first is the corporate tax of 35 per cent on the profit. Then 10 per cent more when it reaches the hand of the shareholder and 35 per cent if he invests in a mutual fund and seeks the help of the CSF funds.
And this is happening at a time when those who make large gains in the stock exchange through speculation are totally exempt from the capital gains tax. There are now 61 mutual funds including 39 open-ended units and 22 closed-ended units. There are also 33 fund management companies. The number has been increasingly rapidly in recent years but the new move in respect of the use of CSF funds, the industry claims, may repress its growth.
Since the use of CSF funds for mutual fund industry, its deposits rose to Rs230 billion by December 2006 from Rs173 billion earlier and the number of mutual fund companies has increased appreciably.
If a person obtains a personal or commercial loan from a bank and invests in mutual funds, he doesn’t pay the 35 per cent tax on the large profit he may be making. But if he uses the CSF funds he has to pay the 35 per cent of the profits as tax. Anyway this high rate of tax on mutual funds is indefensible when there is no capital gains tax.
When it comes to capital gains tax, Dr Salman Shah, adviser to the prime minister on finance, says the time has not come for that. If the time has not come when the Karachi Stock Exchange 100-share index hits 13,370-level, when will it come?
To begin with small savers who have hardly any lucrative option in a period of high inflation and low wages. They have been shut off the stock exchange when they decided that the minimum transaction on the exchanges should be for 500 shares. And the brokers preferred going in for big time speculation or acting on behalf of the big shareholders with hardly any time for the small shareholders.
The banks offer a puny interest rate unless the money is held in deposit for a long-term. Even then they are not the gainers as real inflation is high and the food inflation is over 10 per cent.
The mutual fund industry is not yet fully developed. The deposits of the mutual funds come to five per cent of the bank deposits, while in India it is equal to 15 per cent. The number of mutual fund investors in Pakistan is 150,000, while in India it is 20 million. This is due to low penetration of mutual funds in rural areas which are confined to the cities, but now some efforts are being made to access the rural areas.
Some of the banks are so venturesome that the UBL which set up the first fund management has now four such funds and a fifth Islamic fund is coming up soon.
The three big brokers of the stock exchange Aqeel Karim Dedhi, Arif Habib and Jahangir Siddiqui are in mutual funds in a big way, encouraged by the CFS facility.
The mutual funds should be made free from extra taxation so that more and more funds can come into the industry and the small saver is offered a viable option.
The mutual fund industry, designed to benefit small investors, has been growing slowly at five per cent for the last ten years. But in the recent years it blossomed into an industry with a deposit of Rs230 billion.
