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.