MF distributors want asset management companies, customers to bear service tax

Mutual fund distributors have raised red flag against the government levy of 14 per cent service tax and have made representations with the Ministry of Finance seeking permission to collect the tax either from customers or the asset management companies which receive their services.

Dhruv Mehta, President, Foundation of Independent Financial Advisors, said usually service tax is borne by the recipient of the service and in this case it should be the mutual fund or the asset management company and can be passed on to the customer, if need be.

“If the distributors have to bear the tax then they would end up paying an unprecedented tax of 44 per cent, including the Income Tax of 30 per cent. This would be unfair, especially when the government is talking of bring down the corporate tax to 25 per cent from 30 per cent over the next four years,” he added.

Currently, of the 1.20 lakh registered distributors, hardly about 40,000 are active.

Exemption withdrawn The industry defines active distributors as those who file at least 15-30 new applications every year with mutual funds for purchasing units.

The Union Budget withdrew the service tax exemption given to mutual fund distributors. The tax will be applicable on them beginning this April. There are 45 MFs in the country with total average assets under management of over ₹12 lakh crore.

Irrespective of who absorbs the new tax, the government will be the biggest beneficiary with the inflow into the mutual fund industry growing steadily in the last few months. Going by the current trend, the Centre may collect about ₹800 crore as additional revenue through the tax next fiscal, sources said.

Against Amfi’s proposal Suresh Parthasarathy, President, Independent Financial Professionals Association, said the government’s move to lift the service tax exemption given to distributors comes when the Amfi (Association of Mutual Funds in India) has proposed to cap the upfront commission paid to distributors at 1 per cent.

“The new tax on distributors would only work against SEBI and government’s intention to increase market penetration and enhance retail investment in capital market through mutual funds,” he added.

The number of distributors compared to the country’s population of 1.2 billion reflects the strain on the business and any new tax would only lead to people exiting from the profession, he said.

Alternatively, Parthasarathy added, SEBI should allow AMCs to hike the total expense ratio to the extent of service tax which can then be passed on to the distributors for remittance to the Centre. The calculation of NAV can also be altered to accommodate the tax, he said.

COMMENT NOW