The industry body is likely to come out with clarity on who will bear the service tax burden by next week, said H N Sinor, CEO, AMFI.
AMFI will approach the Ministry of Finance and SEBI to discuss the service tax issue this week.
Sinor told Cafemutual that AMFI has drafted two proposals which it will put forth before the Ministry of Finance and SEBI. The first proposal is to request SEBI to allow fund houses to put all additional levy outside the purview of total expense ratio. Simply put, the service tax will be charged over and above the TER. Thus, the TER could go up by a few basis points.
In the second option, the trade body will seek relaxation on service tax for distributors earning less than Rs.10 lakh per annum. Earlier, AMFI had sent a letter to the Ministry of Finance and SEBI seeking relaxation on service tax for such distributors. Cafemutual was the first to report this development.
AMFI is likely to request the Ministry of Finance to introduce a self-declaration form for distributors earning less than Rs.10 lakh per annum. Sinor said, “Just like form 15 G in which investors who don’t fall under income tax net can claim waiver from TDS from the interest earned on investments, we will request a similar procedure for distributors who earn less than Rs.10 lakh annually. If the proposal goes through, it will benefit a large number of distributors.” According to rough industry estimates, only around 1,200 distributors earn more than 10 lakh per annum.
Income tax norms stipulate that a service provider having an annual income of less than Rs.10 lakh need not pay service tax. However, this does not apply to mutual fund distributors. The ministry has put mutual fund distributors under reverse charge mechanism in which service recipient (AMCs) pay tax on behalf of distributors. Typically, fund houses deduct this tax from the commissions they pay to distributors.
Sinor is of the view that the basic principle of service tax is to charge from end users i.e. mutual fund investors. However, the reverse charge mechanism has made distributors bear the brunt of service tax, he added.
The CEO of a large fund house earlier told Cafemutual that service tax may even go up by 20% if GST is implemented. He said that service tax is a long term issue for the mutual fund industry and said that this issue needs to be addressed as soon as possible.
Meanwhile, the Ministry of Finance has notified that the new service tax guideline will come into effect with June 1.
