Fund houses are likely to be hit with the recent hike in service tax from 10% to 12% on fund management services.
Distributors might be happy with the exemption on service tax on commissions but it means increased cost for AMCs. The budget announced a hike in service tax from 10% to 12%. Fund houses pay a service tax on the assets managed by them, which they used to set off against the service tax paid on distributor commissions. However, with the recent exemption in service tax on distributor commissions they have little leeway to set off such costs. The industry is waiting for clarity from AMFI.
“It will increase the cost for AMCs. AMCs pay a service on management fees. We used to set off some tax against the service tax paid on commissions,” says a sales head of a domestic fund house.
According to SEBI rules, ‘investment and advisory fee’ is chargeable to service tax under ‘fund management service’.
Meanwhile some officials say that they are exploring on how to pass on this cost to investors. “We are seeking clarification from AMFI. Every industry has an option to pass the increased cost to customers. We’ll have to see how it impacts us,” says a CEO of a foreign fund house.
Normally any other industry passes on the increased cost in service tax to its customers. In 2002, the union budget had imposed a 5% service tax on mutual funds. AMFI under the then chairmanship of A P Kurian had represented to SEBI that MFs should be allowed to pass on this cost to investors even if it exceeds the 2.50% maximum expense limit set by SEBI. However, SEBI through its circular issued on June 19, 2002 clarified that AMCs can charge the service tax to the schemes as an item of general expenditure under Regulation 52(4) (xiii). However SEBI said that they cannot exceed the 2.50% expense limit.
“It has been decided that the passing on of the service tax to the unit holders over and above the present limits of total expenses cannot be allowed. However, considering the representation of AMFI, it is clarified under Regulation 52(4) (xiii) that mutual funds can charge the service tax to the schemes as an item of general expenditure. However, the mutual funds must comply with the limits on expenses prescribed under Regulation 52(6), so that there is no additional burden of expenses on the unit holders,” states the SEBI circular.
The matter has again resurfaced with the recent hike in service tax.
