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UTI's cost of dividend to rise

Aabhas Pandya

The 22 per cent dividend distribution tax on assured return schemes is proving to be an albatross for Unit Trust of India. With an 11 per cent dividend tax in fiscal 1999-2000, UTI had to cough up a whopping Rs 2.2 billion as dividend tax last year on its MIPs. The Trust paid a total dividend of Rs 20 billion on 22 monthly income plans between July 1, 1999 and June 30, 2000. The total dividend tax is higher since UTI has some other assured return plans like the Institutional Fund series and some close-end equity funds, which also paid a dividend last year.

No wonder, the mutual fund giant had actively lobbied with finance ministry mandarins when the dividend tax was hiked from 11 to 22 per cent in this year's Union Budget. The dividend tax will jump substantially, with the new dividend distribution tax coming into effect from June 30, 2000.

What has compounded UTI's problem is that the dividend tax is also applicable on those MIPs, which were launched before the new tax law was introduced. UTI had requested the finance ministry to waive off the income distribution tax on those MIPs, which were launched before June 30, 1999 but failed to extract any concession from the government.

As a result, MIPs launched between 1995 and 1999 have also come under the tax ambit. To add to UTI's woes, a large number of MIPs between 1995 and 1999 were launched with assured returns for all the five years and hence, UTI cannot alter the income distribution to adjust for the 11 per cent (now 22 per cent) tax.

Thus, although the amount of Rs 2.20 billion is minuscule (less than 0.5 per cent), given UTI's assets under management of over Rs 640 billion, it is still a loss for the Trust since it cannot charge the dividend tax to the fund's net asset value in most MIPs. It is only since MIP '99 (II) that the Trust has started to assure returns on a year-to-year basis and thus, can promise a payout after providing for the dividend tax.

The highest dividend tax for 1999-2000 was paid by MIP '99, which had garnered the largest subscription ever in MIP series of over Rs 27 billion. The fund paid a dividend of Rs 2.96 billion while the dividend tax was Rs 325.6 million.

Unlike assured return schemes, AMCs have passed the dividend tax to investors in non-assured bond funds. This tax is also deducted from the net asset value of the dividend option.

Source: Value Research

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