One crucial item that Finance Minister Jaswant Singh failed to mention in his Interim Budget speech is hanging heavy on mutual funds.

The one-year exemption on dividend tax on mutual funds, introduced in the last Budget, will lapse on March 31, 2004 unless a subsequent legislation revives the sop.

The Association of Mutual funds in India chairman A P Kurian says, "The exemption granted to equity schemes of mutual funds from paying dividend tax will expire on March 31 and is expected to be continued in the regular budget that will be announced in June."

He hopes that equity schemes will be included in the extension of exemption given to long-term capital gains tax, when the regular Budget is presented.

Hemant Rastogi, a mutual fund analyst added, "Dividend distribution tax appears to be lapsing as there is no mention in the finance minister's speech."

In fact, a section of the market says that if the exemption lapses then "the industry may see dividend pay-outs by equity schemes declining till the time it is re-introduced in the new budget."

Suhas Naik, head-equity, IL&FS Mutual Fund, said, "The dividend pay-out policy of any fund is based on the distributable profits; it is more of a function of the market movements. So, if markets move up significantly by March, dividend pay-outs could be higher."

The FM had granted certain tax exemptions valid for a year to give a fillip to capital markets in his earlier budget speech of 2003-04.

He had exempted all listed equities acquired on or after March 1, 2003 and sold after March 1, 2004 from long-term capital gains (LTCG) tax for a year. In the recent budget speech, the exemption has been extended for another three years.

The finance minister came out with a 'vote-of-account' or Interim Budget 2004 on February 3 instead of a full-fledged Union Budget as Parliament is expected to be dissolved shortly ahead of the forthcoming general elections in April this year.