Veena Venugopal

Mumbai, Jan. 22

TAX authorities have asked mutual fund distributors who have claimed refund on service tax to first prove that they have not collected the same from their customers in order to be eligible for a refund.

The office of the Joint Commissioner of service tax has written to several distributors asking them to furnish evidence that they have not recovered the tax from their clients.

Total sales of mutual funds for the financial year 2003-04, amounted to nearly Rs 6,00,000 crore, according to data from Association of Mutual Funds in India. April to August 2004 netted Rs 3,47,000 crore in sales of mutual fund units.

Currently, brokerages on this vary from 0.05per cent to 2 per cent depending on the type of fund. Equity funds are at the top of the brokerage table with commissions ranging from 1.75 - 2 per cent. Brokerages were even higher during FY04, with institutional plans of debt funds paying as high as 1 per cent in brokerage, as against the 0.20 per cent that is currently offered. Service tax was charged at 8 per cent on total brokerage earned.

According to information available, all mutual fund distributors who have claimed refunds on service tax for distribution of mutual funds are yet to receive the same.

Distributors have been asked to furnish documentary evidence to establish that the amount of service tax for which a refund claim has been filed, was collected from them and that the incidence of such tax had not been passed on by them to their customers. Several distributors have also been asked to prove that they have not received the refund.

The show-cause notice also says that as per Section 12 B of the Central Excise Act, 1944, people who have paid service tax shall be deemed to have passed on the full incidence of the tax to their client, unless it is proved to the contrary.

In view of this point of law, distributors are being asked to show-cause as to why the refund claim should not be rejected.

Mutual fund distributors have been claiming refunds on the service tax paid by them for the last year based on a Delhi High Court order.

In May 2004, the Delhi High Court had ruled that a circular issued by the Ministry of Finance clarifying that mutual fund distributors were not exempt from paying 8 per cent service tax cannot undo the effect of an earlier notification that conferred an exemption from such a levy. This notification had clubbed commissions earned on mutual fund distribution in the category of services that were exempt from payment of service tax.

In September 2004, all commission agents were brought under the service tax regime. The refunds being claimed are for payments made until September 2004. The new notification also brings fees earned on financial advice under the service tax bracket.

Earlier only institutions such as banks were charged service tax on financial advice fees. Now, individual financial advisors are also liable to pay the tax.

The show-cause notice that is now sent to mutual fund distributors gives them 10 days' time to respond. Distributors have to furnish all evidence upon which they intend to rely in support of their defence. They can also opt to be heard in person before the case is adjudicated, said the show-cause notice.

Asset management companies have raised entry and exit loads on mutual funds in order to be able to compensate distributors for the incidence of this tax.

(This article was published in the Business Line print edition dated January 23, 2005)
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