AMFI appointed committee on service tax is expected to approach SEBI to see if the regulator can allow AMCs to hike total expense ratio (TER) in order to offset the 14% service tax burden imposed by the Budget 2015 on distributors.
Distributor associations including IFA Galaxy, Foundation of Independent Financial Advisors (FIFA), Financial Intermediaries Association of India (FIAI), Federation of Mutual Funds Distributors Association of India (FMFDAI) and others have shared their suggestions to AMFI on this issue.
Representatives from FIFA today met the committee appointed by AMFI to suggest measures to neutralize the tax impact on IFAs commissions due to service tax. Sources said that the committee consists of CFOs of UTI, Reliance and ICICI Prudential MF and two outside legal experts.
“We have given our representation to AMFI appointed committee which is looking into service tax. We have suggested that TER can be hiked to absorb service tax. The TER charged in India is not as high as compared to other actively managed funds in foreign countries. Majority of equity assets charge less 2% TER. I think AMFI and the distribution community are on the same page on this issue,” said Yasir Varawala, Founder Member, FIFA.
FIFA says that AMCs can set off service tax paid to distributors against the service tax paid on AMC fees charged to the scheme. “To amend the manner of accounting as specified in para D of the representation attached to make it revenue neutral. Alternatively, FIFA has suggested that service tax on all commission debited to the books of accounts of the AMC should not be deducted from the commission payable to the distributor, since the service tax paid on such commission paid to the distributor can be claimed as a set off against the service tax payable on AMC fees charged to the scheme,” FIFA stated in its representation to AMFI.
In its representation, FIFA states that fee charged by AMC, R&Ts, auditors, trustees and professional fee is charged to the scheme. AMCs are allowed to charge service tax on investment management and advisory fees to the scheme in addition to the maximum limit of TER. Going by this logic, FIFA has suggested that TER should be allowed to go up in order to absorb the service tax.
A K Narayan, President of IFA Galaxy says “People who earn more than Rs. 10 lakh per annum have to pay service tax. About 60% of IFAs earn less than Rs. 10 lakh from MF commissions. Since it has been brought under reverse charge mechanism, all IFAs will be affected. The entire service tax burden can’t be passed on to distributors. We are hopeful that an amicable solution will be arrived at.”
It remains to be seen whether SEBI allows fund houses to increase TER to neutralize the impact of service tax on distributor commissions.
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