Assets return to unit trusts but uncertainty looms with new revenue law

Sri Lanka’s unit trust fund industry, once on the brink of collapse due to the possibility of higher taxes being slapped, has made a sharp pick up in assets under management (AUM), much to the joy of the fund managers, recent data showed.  

Sri Lanka’s unit trust industry, which thrived under the protection of a host of tax exemptions and lower taxes, saw a sudden exodus of funds under management in March this year as investors panicked amid speculations of tax exemptions on the industry being removed.

Mirror Business in an earlier report exclusively revealed this phenomenon, where the AUM of the five largest funds suddenly fell almost 50 percent from Rs.53. 2 billion to Rs. 27.6 billion during the three months to March 31, 2013. 

Sri Lanka’s unit trust fund industry has an AUM of little over Rs.100 billion. 

Assetline Income Fund, Sri Lanka’s single largest unit trust fund managed by Assetline Capital Private Limited, which had AUM of Rs. 27.6 billion by the end of 2016 lost as much as Rs.20 billion AUM during the three months to end up with just Rs.7.7 billion AUM by the end of March 2017. 

However, this fund’s AUM picked up sharply during April to Rs.23.6 billion and further up to Rs.24.0 billion in May as the investor fears over the new taxes appeared to have allayed as the government failed to bring the proposed taxes with effect from April 1 as speculated.

Apart from Assetline Income Fund, which is an open ended money market fund, several other large unit trust funds have also to rebuild their fund size. Although the fears over the new taxes have dissipated, the joy might be short lived because it is uncertain whether the government has already included the proposed yet unimplemented taxes in the new Inland Revenue Bill which could become law within few weeks. 

The budget 2017 proposed to remove withholding tax exemption on dividends received by corporate unit holders and profits earned by the unit trust company, making them liable for 14 percent income tax as opposed to the exiting 10 percent and to make the redemption of units liable for tax, which was hitherto exempted.

The new Inland Revenue Bill, which was drafted behind closed doors to appease the International Monetary Fund (IMF) is likely to bring in the much controversial capital gains tax and has removed almost all other tax exemptions, holidays and concessions, the opposition law makers charged. 
The proposal to remove the exemption of withholding tax on dividends received by a corporate unit holder was particularly targeted at those corporate, who circumvent the tax net by way of investing in unit trusts. 

In Sri Lanka corporates own over 80 percent of the Rs.100 billion AUM of the unit trust industry while only the balance 20 percent is owned by individual unit holders.  

To put things in perspective, there are no more than 40,000 unit holders in Sri Lanka for a population of 21 million.