SUBSCRIBE NEWSLETTER
  • Change Language
  • English
  • Hindi
  • Marathi
  • Gujarati
  • Punjabi
  • Tamil
  • Telugu
  • Bengali
  • MF News Service tax liability of distributors may go up to 18%

    Service tax liability of distributors may go up to 18%

    Also, mutual funds may get costlier for investors.
    Nishant Patnaik Nov 4, 2016

    Service tax liability of mutual fund distributors is likely to go up by as much as 3% to 18%.

    On Thursday, the government has finalized Goods and Services Tax (GST) structure in which it has kept standard rates at 12% and 18%. Though the government has not clarified the tax structure of mutual fund distributors yet, some tax experts whom Cafemutual spoke to are of the view that financial services industry may fall under the 18% tax rate.

    Divyesh Lapsiwala, Tax Partner, EY India believes that the government may keep GST for mutual fund distributors at 18%. “It is unlikely that the tax liability on distributors would go down. Also, a senior revenue official has signaled that the tax rate for the financial service industry will be levied at standard rate of 18%. But the good news is that there will be no cess on this tax.”

    Mumbai based Chartered Accountant Yogendra Jain seconds Divyesh’s view and said that net commissions earned by distributors is likely to go down with the increase in tax rate. He said that the silver lining is that IFAs earning less than Rs. 20 lakh a year may be exempted in the new tax structure. Currently, distributors earning up to Rs. 10 lakh as commissions are exempted from paying service tax.

    Apart from GST rate, another key question that GST raises is regarding the requirement of state specific registration and compliance.

    The senior compliance official of a large fund house told Cafemutual that the cost of compliance for both AMCs and distributors is likely to go up. He said, “The current Bill says that the service tax has to be paid at a place where it has been consumed. AMCs and distributors have investors spread across the country. That means, both AMCs and distributors will have to register themselves with the service tax department of the respective states. This tax can be paid online but auditing and compliance needs to be done at the source state.”

    This official further said that re-introduction of reverse charge mechanism will help distributors deal with this issue. He says, “AMCs anyway may have to register with all states. However, distributors can request the government to put their services under reverse charge mechanism which will shift the onus of paying service tax on AMCs on behalf of distributors. This could reduce the cost of compliance for distributors. However, a few distributors who earn less than Rs. 10 lakh may get affected. But it would benefit all of them for sure in the long run.”

    For investors, the mutual fund scheme may get costlier since fund houses charge service tax on management fee. Suppose the total expense ratio (TER) is 2.50% and the scheme is charging 1% management fee, service tax is levied on management 1% fee. Fund officials say that the TER might go up by 3 to 4 basis points due to the new standard rate.

     

    Have a query or a doubt?
    Need a clarification or more information on an issue?
    Cafemutual welcomes all mutual fund and insurance related questions. So write in to us at newsdesk@cafemutual.com

    Click to clap
    Disclaimer: Cafemutual is an industry platform of mutual fund professionals. Our visitors are requested to maintain the decorum of the platform when expressing their thoughts and commenting on articles. Viewers are advised to refrain from making defamatory allegations against individuals. Those making abusive language or defamatory allegations will be blocked from accessing the web site.
    2 Comments
    SURESH a HARDIKAR · 6 years ago `
    My earnings are less than Rs.10 lakhs per annum.I understand that I need not register for GST and Tax will be deducted @18% in the commission to be paid to me.As stated in the last paragraph of your explanation If fund houses are charging Service tax on Management fees why they have to deduct Service tax from distributor commission?
    Wealth manager · 6 years ago
    Arun Jaitley policy...
    Reply
    Login or Sign up to post comments.
    More than 2,07,000 of your industry peers are staying on top of their game by receiving daily tips, ideas and articles on growth strategies. Join them and stay updated by subscribing to Cafemutual newsletters.

    Fill in the below details or write to newsdesk@cafemutual.com and subscribe to Cafemutual Newsletter now.