Boom in mutual fund industry threatens tax revenue target
Boom in mutual fund industry threatens tax revenue target
Zakki Hakim, The Jakarta Post, Jakarta
The Directorate General of Taxation is concerned that the growing number of banks offering mutual funds to their depositors could threaten the government's income tax revenue target this year.
Sakli Anggoro, a senior official at the income tax division, acknowledged that many banks had been persuading their customers to swap their time deposits with bond-based mutual funds which are tax free.
"This will make the income tax target difficult to achieve," he told The Jakarta Post on Monday.
The government is targeting an income tax revenue of Rp 213 trillion this year. Tax revenue is the main source of income to finance the state budget.
According to Tax Law No. 17/2000, interest gained by mutual funds invested in bonds is not subject to income tax. The tax incentive is only valid for mutual funds during their first five years.
The tax office is considering an amendment to the tax law.
Since last year, banks have become more aggressive in launching their own mutual funds investing in government bonds. The amount of funds collected by mutual funds as of the end of last year jumped to Rp 46.61 trillion from Rp 7.30 trillion in 2001 and Rp 5 trillion in 2000. The Capital Market Supervisory Agency (Bapepam) said that some 80 percent of the money was invested in bonds.
For depositors, the bond-based mutual funds may be a more attractive investment vehicle than bank time deposits, particularly amid the current declining trend in interest rates. While revenue from interest rates in time deposits, which is currently at around 12 percent to 13 percent, is subject to 20 percent tax; returns from the mutual funds of around 13 percent to 14 percent interest per annum are tax free.
Banks can also enjoy a number of benefits by launching mutual funds programs. First of all, they could prevent existing depositors from turning to investment managers offering mutual funds. Second, they could swap part of the government bank recapitalization bonds they hold with cash to be later channeled as credit to the real sector. Banks can also gain a fee from this fixed-income business.
The tax-free facility for mutual funds investing in bonds was initially launched in 1983 and was later amended in 1994 to help push middle-income households to make investment in the domestic capital market.
But Sakli believed that the current investors in the booming mutual fund industry were not ordinary housewives but investors with large amounts of money wishing to escape tax.
Gadjah Mada University (UGM) economist Sri Adiningsih said that the tax-free facility caused the government losses in the realm of Rp 2.5 trillion in potential tax revenue per year.
She that this was based on a projection that the funds tied up in the mutual fund industry could increase to Rp 100 trillion by the end of this year.
Sri also said that the tax incentive facility should be scrapped as the mutual fund industry could easily abuse the policy by limiting the life span of their mutual funds to five years.
She said that the mutual fund industry did not need such a tax incentive any longer.
But an official at Bapepam said that eliminating the tax incentive would kill the mutual fund industry.