Unit trust industry survival at stake as tax concerns loom large

Sri Lanka’s unit trusts, once a blessed industry with lax taxes, is likely to be in for a rude shock with the proposed imposition of a slew of new and increased taxes, which will soon find their way into the industry, threatening its survival.  
Among the tax reforms proposed is the removal of withholding tax exemption on dividends received by corporate unit holders—a move that could make unit trust investments unattractive for corporates, which in turn would amount to a massive blow to the industry.   
Also, by making the unit trusts liable for withholding tax at the rate of 14 percent, the government has invariably created disparity in applying taxes among alternative investment classes as the same tax on a bank deposit is only 5.0 percent, says Dilshan Wirasekara, the CEO of First Capital Holdings, an investment bank. 
“Obviously the impact is going to be huge,” Wirasekara told a capital market conference recently in Colombo. Further, the profits earned by a unit trust company will become liable for 14 percent income tax against the existing 10 percent.  The redemption of units which were hitherto not liable for tax will also become liable for tax. All these taxes are expected to come into effect from April 1, 2017. 
Meanwhile, the notional tax credit, which is hitherto available on the income on instruments subject to upfront tax such as treasury bills, bonds or corporate debt securities, will also be removed and will become taxable on the net interest.  
Unit trusts were introduced to Sri Lanka during the 1991/92 with the main objective of broad basing the share ownership after the incorporation of the Colombo Stock Exchange in 1985. But it is debatable whether that objective is achieved as there are only 40,000 unit trust investors consisting of just under 0.2 percent of the population.  
The unit trusts currently have about Rs.100 billion assets under management (AUM), down from Rs.133 billion in 2015, and at least 80 percent of the funds are corporate. 
“Potentially this (AUM) is going to drop significantly by 1st of April”, as the corporates who are now on a wait-and-see mode on the taxes will withdraw their funds, Wirasekara added. 

Over the years corporates have been using unit trust investments as a channel to bypass taxes on investment income. By slapping a myriad of taxes on the industry, the government appears to be clamping down on corporates misusing the unit trusts as investment vehicles to dodge taxes.   
However, this could result in some of the unit trust companies closing down their operations as the industry AUM could potentially shrink to Rs.20 billion, which would make their existence financially unviable.
“We are definitely thinking in that direction,” remarked Wirasekara, whose company also manages a few unit trust funds.  
Meanwhile Ravi Abeysuriya, the Director of Candor Group said these circumstances would decide the fate of most of the unit trust companies in Sri Lanka as they would either be forced to consolidate or close down their operations.
There are about 37 investment managers in Sri Lanka and NDB Wealth, Capital Alliance and Namal jointly held 46 percent of the AUM in 2015. 
David Pieris group company, Assetline Capital (Pvt) Limited run the largest fund with Rs.27.6 billion AUM by the end of 2016, Unit Trust Association of Sri Lanka’s performance report showed.