Fund houses will deduct a service tax of 14% on the commissions of distributors.
The earnings of mutual fund distributors are likely to take a hit with the Budget proposal to withdraw service tax exemption given to services of mutual fund distributors to AMCs. The bad news is that the FM has also proposed to hike service tax from the current 12.36% to 14%.
If the Budget proposal goes through, fund houses will deduct a service tax of 14% from next fiscal on the commissions paid to distributors. For instance, if a distributor gets Rs. 10,000 commission per month now, he/she will receive Rs. 8,600 (10,000 - 1,400) from next fiscal.
Distributors are not enthused by the Budget proposal. “This will further impact our revenues at a time when regulator is looking to cap upfront commissions,” said a Mumbai based distributor.
“While the Budget was good for the economy it was not so good for distributors. The commissions are coming down and it was not appropriate to withdraw service tax exemption at this juncture,” said Ramesh Bhat, a Chennai based advisor.
The Finance Ministry had given exemption on service tax to mutual fund distributors in 2012. During that time the service tax was 12.36%.
Meanwhile, AMCs stand to gain from this move. AMCs are allowed to set off service tax deducted from distributor’s from upfront commissions. “Upfront commissions are paid by AMCs and to that extent service tax be set off against the service tax paid on the management fee earned,” said the sales head of a private sector fund house.
