Budget 2016 has finally put an end to the service tax war between mutual fund companies and their distributors. From now, only agents who earn commissions above ₹10 lakh a year as income from distribution are liable to pay service tax.

Beginning 2016-17, the 14 per cent service tax levied on mutual fund distributors will be a “forward charge,” effectively taxing only those agents whose commission income crosses the ₹10-lakh mark. The distributor will directly pay this tax to the Centre. Currently, this 14 per cent levy is a “reverse charge” which means all distributors are liable to pay it regardless of the size of their income. Fund houses deduct this tax before paying out the commissions to them.

The debate about who pays service tax has been raging in the industry since Budget 2015 withdrew the service tax exemption for MF distribution. Even as distributors complained, fund houses paid out commissions only after deducting service tax.

Main demand met

Settling the issue of service tax was one of the main demands of the fund industry this year, said CVR Rajendran, CEO, Association of Mutual Funds of India. BusinessLine had reported this last December. With the amendment to the tax rule, Rajendran said, only about 4,600 distributors (of the roughly 38,000 active agents) who earn commission above ₹10 lakh will be affected.

However, Nilesh Shah, MD, Kotak Asset Management, said the exemption should be implemented at the individual agent level using the Employee Unique Identification Number (EUIN) and not the AMFI Registration Number (ARN).

“We will have to see how this rule is drafted,” he said, “but by going with EUIN, the service tax liability also excludes aggregators of agents, such as a national distributor, a bank or an association of individual agents. This will help the aggregator model survive as well.”

No more merging blues

The Budget also proposed removing capital gains tax when plans within a particular scheme are merged. This way, investors who transfer their units from the dividend option to the growth option, will not have to pay tax.