The unit prices in the mutual fund sector have dropped over the past few weeks even though they disbursed handsome dividends in recent times as the National Board of Revenue (NBR) suggested deducting source tax from the cash dividend income. 

Mutual funds pool money from investors to channel it into securities such as stocks and bonds. Depending on the profits earned, investors are paid their share as dividends.

On August 10, the NBR's tax policy department responded in the affirmative to a letter from the Large Taxpayers Unit (LTU), saying that source tax is deductible from a mutual fund's cash dividends.

Such a response from the NBR disheartened unitholders of mutual funds and so, they started selling their units even when the market index was on a rising trend.

"Globally, without exception, the income from mutual funds and other collective investment schemes are tax-exempt," said Hasan Imam, president of the Association of Asset Management Companies and Mutual Funds.

As mutual funds are required by law to disburse a majority of their income to investors every year, they are considered "pass-through" structures.

The revenue authority collects taxes on the dividends disbursed by mutual funds at the investor level.

"So, taxing mutual funds in this manner is equivalent to triple taxation. We hope the relevant authorities will consider this basic principle and allow the income from mutual funds to remain tax-exempt," said Imam, also the chief executive officer of Bangladesh Race Asset Management, the biggest private sector fund manager.

"Otherwise, this critical capital market sector will be negatively impacted."

There are 116 mutual funds managed by 33 asset management companies in the country, as per data of the Bangladesh Securities and Exchange Commission (BSEC). The total assets under management amount to around Tk 17,290 crore.

Stock market analysts say the BSEC is urging people to invest in the mutual fund sector in a bid to keep the market stable and attract new investors. However, the NBR's reply to the LTU will upset general investors.

Shahidul Islam, chief executive officer of VIPB Asset Management, said mutual funds are not taxable, so the NBR's view is contradictory in this regard.

Tax is already deducted when a fund manager provides dividends to their unitholders and so, a tax on the funds themselves is clearly multiple taxations on the same income.

"So, this source tax is not logical," Islam said, adding that he believes the NBR will soon issue a clarification in this regard.