Unit Trust firms consider winding up, consolidation amidst regressive taxation
Removing tax incentives to the unit trust industry will see many asset management firms dealing mostly in unit trusts winding up or selling their firms to bigger counterparts, a top official said.
“There’s an acute disparity between the taxation say of a fixed deposit and a unit trust. This will force asset management firms to wind their unit trust businesses. We are certainly thinking about it,” Dilshan Wirasekara, CEO First Capital Holdings PLC which has an asset management business told the Business Times.
Since the inception of unit trusts in Sri Lanka, the Government has been granting some tax concessions to promote the industry. Through the 2012 Budget proposals the profits and income from redemption of units were exempted from income tax in the hands of the investors. This assisted the industry to collect funds from corporate investors who could enjoy a tax benefit of 18 per cent when investing in unit trust funds.
In the recent budget proposals, such benefits to corporate investors have been removed. This may initially result in an outflow of funds from the industry and exert pressure on the unit trust management companies, P. Asokan, Consultant SEC told the Business Times.
Removing the tax break would not be a problem as long as there is a level playing field between the tax impact to an investor investing through a unit trust fund or investing directly in a financial instrument such as treasury bills, bonds, debentures, commercial paper or bank fixed deposits is what the industry is calling for.
The basis for any investment should be the tradeoff between the risk you take and the return you get for taking the risk; and not the tax rate, said Vindya Jayasekera, Vice President NDB Wealth Management Ltd. “The budget 2017 proposes a withholding tax of 5 per cent for individuals investing in bank deposits while unit trusts would be subject to a 14 per cent withholding tax. Similar tax differentials proposed at various levels creates an unequal playing field and ultimately could lead to the deterioration of an industry that is established globally to improve investment opportunities to retail investors and enhance financial market efficiency,” she explained.
Unit Trusts provide investors opportunities to invest in markets like treasury bills, bonds, commercial paper etc. which most may not have access to. In spite of the benefits available to retail investors, the industry remains small and under-penetrated with assets of Rs. 100 billion (versus bank assets over Rs. 8 trillion), Ms. Jayasekera added. One reason for this, she says is that it may be because the tax rate for individual investors in unit trusts (10 per cent) was higher than the tax rate applicable to bank deposits (2.5 per cent) creating an unequal playing field between bank deposits and unit trusts for individual investors.
Mr. Wirasekara added that his firm will be focusing more on the wealth management business of their asset management firm. “We’ll be focusing on wealth management and products such as retirement planning.”
While the SEC has made representations pertaining to this, the word on the street is that these same budget proposals will remain.
However, creating a level playing field in taxation between unit trusts and bank deposits will certainly improve investor participation and in turn broadbase the asset ownership and increase efficiency of capital market, is what all industry participants say.
On the other hand the absence of this tax will persuade the unit trust management companies to focus on increasing their retail investor base and promote equity funds as these funds will continue to remain tax exempted in the hands of the investors, Mr. Asokan added.