If SEBI permits AMCs to hike total expense ratio (TER), fund houses can pass on service tax to mutual fund investors, say fund officials.
Fund houses are mulling the possibility of passing on the service tax burden to mutual fund investors, according to sources. The Union Budget 2015 withdrew the service tax exemption given to mutual fund distributors by putting it under reverse charge mechanism.
Some top mutual fund officials are said to have met SEBI yesterday to discuss this issue. “It can be passed on to investors if SEBI allows us to increase the TER,” said the CEO of a private sector fund house.
If the service tax is charged to TER, the TER may go up to that extent.
Sudhir Kaushik, Chief Financial Officer, Taxspanner says 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. Instead of MF distributor collecting the service tax from the AMC and remitting to the government, the procedure in reverse charge is the service tax is directly paid by the AMC. Hence there is no point of deducting service tax component from the commission as at the end service tax needs to be borne by the AMC only. Since the reverse charge mechanism is proposed in the budget, the service tax needs to be paid by the service receiver directly and the service provider will not charge service tax in his bills. Since the mutual fund distributor is providing service to AMC, service tax will be paid by the AMC and not MF distributor.”
Sudhakar Ramasubramanian, Managing Director, Aditya Birla Money is of the view that since the service is received by investors, the added cost can be passed on to investors in addition to TER. "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. Under the reverse charge mechanism, only the onus to pay the tax that has been passed on to the AMCs. They have to pay to the government on behalf of the service received from distributors. The ultimate service is received by investors. So, if needed, in case the AMCs do not have enough service tax credit, it may be collected as an addition to the TER on a similar basis as the AMC service tax is being currently collected."
In the earlier regime, the commissions paid to distributors were inclusive of service tax.
Meanwhile, AMCs are waiting for clarity from government as to who is receiving service in this case. “There is no clarity on who is getting service – investor or AMC. So we have to wait for some clarity on this. Until then, the service tax will be deducted from distributor’s commission” said the sales head of a public sector fund house.
While it is too early to conclude if SEBI will allow AMCs to pass on the service tax burden to investors, we need to wait and watch for some finer details on the treatment of service tax to emerge from the government.
