New Delhi: Capital markets regulator SEBI on Wednesday said stamp duty is not applicable on redemption of mutual fund units but switching in mutual fund would attract the stamp duty.
SEBI released the FAQs on stamp duty collection on Wednesday, with the provisions of the amended Indian Stamp Act coming into effect.
The regulator said that the units of mutual fund schemes are to be considered as securities for the purpose of applicability of stamp duty.
Regarding applicability of stamp duty on redemption of mutual fund (MF) units, SEBI said "redemption is not liable to duty as it is neither a transfer nor an issue nor a sale."
However, switching in mutual fund would attract stamp duty. "The issue of fresh units in the switched scheme would attract stamp duty even though there is no physical consideration paid or transfer of ownership," SEBI said.
This is because the new units are deemed to have been purchased with the NAV (net asset value) realized from the sale of earlier units, it added.
On calculation of stamp duty on issuance of mutual fund units, SEBI said stamp duty is imposed on the value of units excluding other charges like service charge, AMC fee, GST etc.
If the units are issued for Rs 1 crore then Rs 500 stamp duty is to be remitted to states.
The government in January had notified RTAs to act as depository for limited purposes of acting as a collecting agent under the Indian Stamp Act, 1899.
Therefore, Registrars to an issue and share Transfer Agents (RTAs) would collect stamp duty for non-demat mutual fund and alternative investment funds (AIF) transactions.
Read more:Pharma stocks gained 55% since lockdown
"The transfer of collected stamp duty to respective States/UTs by RTAs also is governed by buyer-based principle ... and not on the basis of registered office of the issuer," markets watchdog noted.
In case of mutual fund and AIF transactions through recognized stock exchange, the respective stock exchange/authorized clearing corporation or a depository is already empowered to collect stamp duty.
On transfer of units of Mutual Funds and AIFs held in physical form stamp duty is to be collected from the transferor but these transfers happen outside the purview of RTAs.
In such cases, SEBI clarified stamp duty has to be collected and remitted only by collecting agents, which is RTA for physical units and depositories for demat units. Where mutual Fund and AIF units are issued in physical form, stamp duty has to be collected and remitted by RTA.
Accordingly, when the transferee approaches RTA for effecting the transfer in their books, RTA will be collecting the stamp duty from the transferor before effecting the transfer which will then be remitted to the state of domicile of the transferee. The collecting agents have to transfer collected stamp duty to the state government within three weeks of the end of each month.
If any collecting agent fails to collect the stamp duty or fails to transfer stamp duty to the state government within fifteen days of the expiry of the time specified, shall be punishable with fine of not less than Rs 1 lakh which may extend up to one per cent of the collection or transfer so defaulted.
The finance ministry on Tuesday said states will collect stamp duty at uniform rate on transactions of shares, debentures and other securities from July 1.
With this, the stamp duty will have to be paid by either the buyer or the seller of a financial security, as against the current practice of levying the duty on both.
The present system of collection of stamp duty on securities market transactions led to multiple rates for the same instrument, resulting in jurisdictional disputes and multiple incidences of duty, thereby raising the transaction costs in the securities market and hurting capital formation.
The finance ministry said the move is aimed at facilitating ease of doing business and bringing in uniformity of the stamp duty on securities across states and thereby building a pan-India securities market.
Stamp duty on MFs to reduce portfolio churn by investors
The imposition of stamp duty on mutual funds will impact in case of churning the portfolio and will encourage the investors to stay invested for a longer duration.
Any transaction that results in issuance or transfer of units to the investor will be subject to stamp duty. Effectively, it will act as an entry load as allocation of units will be at net amount post deduction of stamp duty.
According to a report by JM Financial, investors in overnight/liquid fund category with investment horizon of seven days and below will have negative impact due to stamp duty levied.
"Imposition of stamp duty will impact in case of churning the portfolio. It will encourage the investors to stay invested for a longer duration and not churn portfolio for higher yields," the report said.
In case of early exit from a fund, the impact of the stamp duty is higher and it reduces with the increase in investment horizon which essentially will reduce the churning. It will have negative impact on the institutional clients who park their short-term money in liquid or overnight funds.
Decreasing yields and additional expense of stamp duty will have negative impact on the overnight/liquid category, the report said.
In comparison with FD returns, the impact of stamp duty is high in case of short holding period of less than seven days. Generally, fixed deposits are for duration of more than seven days. The comparison between the bank FD returns and liquid/overnight returns shows that overnight and liquid funds are still better placed as compared to FD returns.
Read more:Govt to kickstart cashless treatment for road accident victims with Rs 2.5 lakh cap per case
A stamp duty of 0.005 per cent will be levied on issuance of units and 0.015 per cent on transfer of mutual fund units.
Stamp duty is applicable in the instance of investment, i.e., buying of units. Hence, any transaction that results in issuance or transfer of units to the investor will be subject to stamp duty. Effectively, it will act as an entry load as allocation of units will be at net amount post deduction of stamp duty.
The transactions which attract 0.005 per cent duty are purchase of units, switch-in of units, systematic investment or transfer installments (SIP/STP) and dividend reinvestment of units.
The transactions which attract 0.015 per cent duty are buying units on stock exchange through a stock-broker, for e.g. ETF, closed ended schemes, off-market transfer of units, i.e., transfer of units from one demat account to another demat account.
According to a report by B&K Securities, the stamp duty will be like an entry load, hence the allocation will be for net amount after deduction of stamp duty.
The impact of stamp duty on overall returns reduces as the investment horizon increases. The report said that selection of right investment category according to the investment horizon will be of benefit to the investor, as it will ensure that stamp duty is not paid repeatedly on same investment.
(With inputs from PTI and IANS)
