The Hindu Business Line : MF distributors get a breather on service tax

THE stand-off between distributors and asset management companies about the incidence of service tax has been temporarily solved by the Delhi High Court. The court has ordered that the circular, which clarified that mutual fund distributors were not exempt from payment of service tax, cannot override the notification that specifies the exemption. The case was filed by Bajaj Capital Ltd, a Delhi-based financial services distributor.

The notification on service tax, which was issued on June 20, 2003, stated that "the Central Government being satisfied that it is necessary in the public interest, hereby exempt the business auxiliary services provided by a commission agent from the service tax levy able thereon. For the purpose of this notification, commission agent means a person who causes sale or purchase of goods on behalf of another person for a consideration which is based on the quantum of such sale and purchase."

This indicated that mutual fund distribution agents were not liable to pay the service tax on the commission earned by them. However, in November, the Ministry of Finance issued a circular that clarified that mutual fund distributors are not exempted, as mutual fund units are not "goods."

The court order has taken the view that this circular cannot influence the guideline. "This indicates that until the Ministry redrafts the contents of the circular as a notification, mutual fund distributors would be exempt from paying service tax. Making this notification is a larger process and would be a lengthy proposition," said Mr Sanjiv Bajaj, Director, Bajaj Capital Ltd.

Distributors are cautious about the implications of the order. They feel that the circular would be converted into a notification and the tax would be collected. "We will continue with our efforts to ensure that we are not forced to bear the tax," said a distributor. Several distributors had met with Mr A.P. Kurien, Chairman, Association of Mutual Funds in India (AMFI), last week to come to a formal sharing agreement or a methodology to pass the service tax to the investor. However, the meeting was inconclusive.

Mutual fund houses have begun to increase the entry loads on equity schemes in order to cover the service tax. "Equity funds are less than 20 per cent of the assets under management of the industry. The reason why fund houses do not want to raise the loads on debt and liquid funds is because large institutional investors have arm twisted them and are threatening to redeem money invested in these funds," said a distributor.

Distributors have also clarified that if fund houses do not agree to take on the burden of service tax on themselves or pass it to the investor, they would be forced to move on to other lines of business. "Why should we sell mutual fund products if they are not profitable? After all, we are in business, not charity," opined a distributor.

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