The Budget 2016 has bought some relief for mutual fund distributors.
The Budget 2016 has proposed to transfer onus of paying service tax on commissions from AMCs to distributors and exempted IFAs earning less than Rs.10 lakh from paying service tax by putting it under ‘forward charge’ mechanism.
Explaining the forward charge mechanism, Gurgaon based Chartered Accountant, Amit Maheshwari, Partner Ashok Maheshwary & Associates said that forward charge mechanism has two key implications for distributors. “Firstly, distributors earning less than Rs.10 lakh need not pay service tax. Also, distributors earning more than Rs. 10 lakh can avail the benefit of cenvat credit by setting off the service tax payment against other services availed,” said Amit.
Another Mumbai based Chartered Accountant, Yogendra Jain seconds Amit’s views, “According to forward charge taxation, a person earning above Rs. 10 lakh has to pay service tax only on the additional commission in the first year. For instance, if a distributor has earned Rs.11 lakh in a financial year, he has to pay service tax only on Rs.1 lakh. However, in the subsequent year, the distributor will have to pay on entire commission earned even if it is less than Rs.10 lakh. However, we are awaiting more clarity on this.”
AMFI, in its Budget wish list sent to the Ministry of Finance, had sought relaxation on service tax for distributors earning less than Rs. 10 lakh commission annually. Earlier, C. VR. Rajendran had said, “We have sent a letter to the Ministry of Finance seeking relaxation for distributors earning less than Rs.10 lakh commission annually. We have apprised the Ministry about the detrimental effect the service tax will have on the growth of the mutual fund industry.”
Another key implication of the ‘front charge’ mechanism is cenvat credit benefit. Distributors stand to gain from this move as they will be allowed to set off service tax against other services. Tax experts say that distributors will have to take service tax number to avail this benefit and 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 2012, the government had put the services of mutual fund agents under the negative list which exempted them from paying service tax. Till 2012, AMCs were deducting service tax and paying it to the government. In Budget 2015, this exemption was withdrawn.
Currently, fund houses are deducting service tax on commission income of distributors as it is under reverse charge mechanism.
