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.