If AMCs deduct service tax from distributor’s commission, they need to issue a certificate to distributors so that distributors can set it off against the service tax paid by them to other service providers.
Ever since Budget 2015 proposed to withdraw the service tax exemption given to mutual fund distributors and brought it under reverse charge mechanism, there is a debate among distributors as to who will be liable to pay this tax –distributor or AMC.
A notification dated February 28, posted on Central Board of Excise and Customs (CBSE) site states “Accordingly, service tax in respect of mutual fund agent and mutual fund distributor services shall be paid by the asset management company or, as the case may be, by the mutual fund receiving such services.”
This will come into effect from April 01, 2015.
We spoke to AMCs and tax experts to get clarity on this issue. Looks like AMCs can’t pass on the service tax to investors since they are already charging service tax on management fee. “Investor is not at fault. We charge a service tax on the management fee. I think it will be deducted from distributor’s income,” said the operations head of a bank sponsored fund house.
AMCs won’t charge anything extra to investors as the TER is prescribed by SEBI. “We can’t charge service tax to investors as cost limits are prescribed by SEBI. It will be passed on to distributors,” said the sales head of a private sector fund house.
“Once GST is implemented, most goods and services will be brought under service tax net. Mutual fund distributors are spread across the country and the government can’t catch them individually. Thus, it has brought it under reverse charge mechanism. AMCs will have to pay the service tax to government. Whether they’ll deduct it from distributors or not is not known yet. Earlier, mutual fund distributors were exempted from service tax which is removed now and brought under reverse charge mechanism,” said Sudhir Kaushik, CFO, taxspanner.com.
A Mumbai based CA says that under the reverse charge mechanism, AMCs will have to pay the service tax to government. “If AMCs deduct service tax from distributors commissions they have to issue a service tax certificate to distributors. Distributors can use this certificate to set it off against the service tax paid by them to other service providers. This way, distributors will get relief to the extent of service tax paid by them to their vendors. In case of the services provided by insurance agents to the insurance company under the reverse charge mechanism, the liability of service tax is on the insurance company. That means, insurance agent is not liable to pay any service tax.”
“A lot of services are being brought under service tax net as we move towards GST. If any new service is brought under service tax net, it will be based on the contractual terms of service provider and receiver,” said an official from KPMG.
Meanwhile, some AMCs are planning to take up the matter with AMFI. “Some AMCs are saying that they will discuss the matter with AMFI. I hear that few large distributors are asking AMCs to pay the commissions before April, fearing that they will have to take a service tax hit. As of now, there is no clarity on who will bear the service tax,” said a Mumbai based distributor.
Since AMCs are allowed to set off commissions against service tax charged on management fee, some believe that AMCs and distributors can mutually work out a solution on this issue. “It can be negotiated with the AMC. As of now it is not clear. We are waiting for details from the government. AMCs can set off the service tax against the service tax charged to investors on management fee. So, the net effect will not be much,” said a senior official from a national distribution firm.
Meanwhile, some fund houses are in the process of consulting legal experts to get a clarity on this issue.
Mutual fund distributors were exempted from service tax in 2012. Read the notification here.
