The Hindu Business Line : Service tax woes

The mutual fund industry in India has grown by leaps and bounds since evolving many years back. NAVs of mutual funds now compete with stock prices for space in financial newspapers. To the conservative investor, mutual funds have given decent returns without one having to risk entering the stock market. This trend is bound to continue.

The Association of Mutual Funds of India (AMFI), in collaboration with the Securities Exchange Board of India, proposes to issue guidelines for real-estate mutual funds. Considering the passion the nation has for real-estate, one can expect significant investments in these funds. The concept of fund of funds — funds investing amongst themselves — is also catching on, which is certain to mature the market even further. A lot of this activity has happened because of mutual fund distributors — a variation of the stock broker.

The service tax, which impacted stock brokers long back, looked at mutual fund distributors much later. At the time it was introduced, it was passé to give rebates and exemptions under service tax. The Finance Act, 1994 — still the legal form of the Service Tax Act — decided to levy the tax differently in case of investments in mutual funds.

Up in arms

It levied the tax on the distributors instead of the norm of levying it on the end-user — akin to what was done in the case of road transport operators. The mutual fund distributors are now up in arms. They charge that in the case of insurance and financial services, service tax is paid by the end-user and there is no logic in not permitting the distributor from recovering the tax from the end-investor.

To ensure that the tax is collected, the service tax is deducted from all payments made to the distributors of mutual funds. The distributors have been having a running battle with the AMFI to get this issue resolved — with no success — for the past two years now. Just to give an idea about the size of the industry, the AMFI states that there are about 6,800 mutual fund distributors in Mumbai and more than 1,800 in Delhi. These distributors have helped propel the industry to its present level and are of the opinion that they need to feel motivated to continue their job. The present law only assists in putting a deep hole in their pockets.

This is but a small example of the need to take a good, hard look at the Finance Act, 2004 as regards service tax. In its present form, the provisions compete with the Central Excise Act in terms of complexity and a passion for issuing notifications not to speak of the myriad case law resolving issues.

Prevailing confusion

A recent case, Bajaj Auto Finance vs CESTAT, underscores the confusion. Hire-purchase is a sub-sect of "banking and financial services" which is defined to mean "financial leasing services including equipment leasing and hire purchase by a body corporate."

A rather juicy amount of Rs 26 crore was demanded, which the company decided to argue against by stating that they are not in the business of hire purchase but in hire purchase financing. The Revenue opined that the two were synonymous as the hirer enters into agreement with the person who provided financial services and in lieu of such services, the hirer pays a certain amount as hire or finance charges.

The CESTAT took shelter in the Supreme Court's decision in Sundaram Finance Ltd vs State of Kerala, wherein it was held that hire-purchase is not the same as hire-purchase financing. A revamp of the service tax provisions is overdue. The Finance Act, 2007 provides an excellent opportunity to kick-start the process.

(The author is a Hyderabad-based chartered accountant.)

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