Government to tax mutual funds next year

Government to tax mutual funds next year

The Jakarta Post, Jakarta

The Directorate General of Taxation plans to impose income tax on
profit obtained from bond-based mutual funds starting in a year,
according to a senior tax official.

"We plan to introduce the new policy on Jan. 1, 2005. We're
now in the process of calculating the (tax) rate," said director
for income tax at the directorate Petrus Tambunan on Monday.

He said that the government decided to impose a new tax on
bond-based mutual funds to prevent "distortion" as gains on
mutual funds based on other securities were subject to taxation.

He added that the tax office would continue to hold talks with
the market players in the mutual fund industry to decide on the
actual rate.

According to Tax Law No. 17/2000, interest revenue gained by
mutual funds that invest in government bonds are not subject to
income tax. The tax incentive is only valid for mutual funds
during their first five years since floating. The government is
now in the process of revising most of the country's tax laws.

The tax free facility has been the main reason behind the
recent boom in the country's mutual fund industry. Mutual funds
in the country have a total value of Rp 90 trillion (US$10.71
billion) compared to only around Rp 5 trillion in 2000.

With the declining domestic interest rates, many people have
transferred their money from long-term bank deposits into mutual
funds as revenue obtained was tax free and interest revenue
obtained from time deposits are subject to a 20 percent income
tax.

Many local banks have also launched mutual fund products to
help prevent their time depositors from running away to other
financial institutions.

The tax free facility, first introduced in 1983 and had since
been revised several times, and was aimed to help bolster the
interest income of middle-income households to invest in the
local capital markets.

But with the government now under pressure to collect a higher
tax revenue to help finance the state budget, the tax free
facility is longer affordable.

Some experts said that the potential tax revenue loss from the
tax break facility was around Rp 2.5 trillion per year.

There have been fears, however, that eliminating the tax break
could kill the local mutual fund industry.