United Forum has filed an appeal with the Bombay High Court against the government on levy of service tax on distributors, said two sources familiar with the development. United Forum is an umbrella banner of various IFA/distributor associations.
In its appeal, United Forum has opposed the levy of service tax on distributors earning over Rs.10 lakh a year. Instead, the forum has appealed passing on such a liability onto investors as they are the end consumers of the product.
In 2012, the government had put the services of mutual fund agents under the negative list that exempted them from paying service tax. Until 2012, AMCs were deducting service tax and paying it to the government. In Budget 2015, this exemption was withdrawn and the onus of paying service tax passed on to the distributors. However, due to reverse charge mechanism, AMCs were deducting service tax directly from the commission.
The Budget 2016 has shifted the onus of paying service tax on commissions from AMCs to distributors and exempted IFAs earning less than Rs.10 lakh from paying service tax by putting it under ‘forward charge’ mechanism.
Sudhir Kaushik, Chief Financial Officer, Taxspanner had earlier told Cafemutual that mutual fund distributors are not liable to pay service tax for services rendered by them to AMCs. “Since service tax is always borne by end consumers/service receivers, the tax bearing effect is not changed but only the procedure is changed. Since the mutual fund distributor is providing service to AMC, service tax will be paid by the AMC and not MF distributor.”
Many MF distributors feel that such taxes should be borne by the investors. "The service tax is typically paid by the buyer of the service. Either the mutual fund or the customer, in this case. The service provider (distributor) should not be paying. The ultimate service is received by investors," said a Mumbai based distributor on the condition of anonymity.
“If, the onus of paying service tax is passed on to investors then SEBI may allow us to increase the TER. Simply put, the TER may go up to some extent,” said the CEO of a private sector fund house.
According to industry estimates, only around 1,300 distributors earn more than 10 lakh annually.