The Hindu Business Line : MFs, agents still don't see eye-to-eye on service tax

THE tussle between distributors and mutual funds over service tax payment has intensified with the March 31 deadline looming large. There is an 8 per cent service tax to be paid on "distribution of mutual funds."

Unlike the insurance industry that started paying brokers commission net of service tax, mutual fund asset management companies (AMC) have left distributors to pay their own service tax.

Distributors feel that the tax burden for this year would have to be borne by the AMC, if not fully at least partly. "With 25 days left to go, most distributors are taking up this matter with AMCs, it is premature to say who would take the burden of the tax. If AMCs fail to support distributors, we would be left with no choice but to take the liability for this year," said Mr. Sandeep Raichura, Head (Research), Cholamandalam Distribution Services.

"As AMCs are paying the service tax that is due from Registrars, custodians and other intermediaries, they must also pay the 8 per cent tax on distribution as well. Everybody is stretched and while AMCs are taking up the matter with SEBI, they have to evolve some kind of a sharing arrangement for this year," said Mr Sanjiv Roy, Chief Executive Officer, Birla Sun Life Distribution Services.

The burden of service tax is likely to fall on the investor next year. This would mean that returns from debt funds or non-performing equity funds would be further reduced by 8 per cent, making them equivalents to bank deposits. "There is also a possibility that this would increase to 12 per cent next year," said Mr Roy.

"The final arrangement of this year's tax is not clear yet, it is still work in progress. There is a likelihood that the investor would pay the service tax from the next financial year; some products where the returns are not very high, it is possible that this would be borne by either the fund or the distributor," according to Mr Naval Bir Kumar, Chief Executive Officer, Standard Chartered Mutual Fund.

The Association of Mutual Funds in India (AMFI) is not taking a stance on this issue. "There have been discussions with SEBI on this, until a decision is made presumably the distributor would pay this tax," said Mr A.P. Kurien, Chairman, AMFI. According to Mr Krishnamurthy Vijayan, Chief Executive officer, JM Mutual Fund, in a year that mutual funds were aggressively going retail it did not make sense to charge this on the investor.

Investors are happy that this would not be levied retrospectively for this year. "Next year, a lot of funds would be rendered unattractive to the investor because of the additional 8 per cent payout. It would make sense to invest directly in debt or equity products rather than the mutual fund route," said Mr Mahesh Murthy, a mutual fund investor and Chief Executive Officer, Passionfund.

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