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MF industry pitches for service tax exemption for distributors
February, 11th 2016

This year the mutual fund (MF) industry’s pre-budget proposals largely revolve around tax exemptions and tax breaks, as per two persons directly involved in the process.

The pre-budget recommendations of the MF industry, routed through the market regulator, Securities and Exchange Board of India (Sebi), have sought relief on service tax to the distributor community.

In the Union budget 2015-16, services provided by MF distributors were brought back within the ambit of service tax. This led to an affective tax liability on these intermediaries at 14%.

As a mechanism, the tax is passed to the tax authorities by the asset management companies (AMC) which is collected from distributors after reducing it from their commissions. This is referred to as “reverse charge mechanism”.

The AMCs have sought that to prevent a direct hit to small distributors, there should be a threshold for service tax exemption set at Rs.10 lakh.

In the recommendations, AMCs have referred to a notification by the service tax department in 2012 which allowed for this exemption. But due to the reverse charge mechanism the distributors cannot avail the exemption.

“The government could consider making suitable amendments to extend the benefit of the threshold exemption of Rs.10 lakh to mutual fund distributors under reverse charge mechanism,” said the chief executive officer of a leading AMC, on condition of anonymity, as a decision is pending in the matter.

The industry has also sought that tax-saving equity schemes or equity-linked saving schemes (ELSS) should get additional tax breaks to promote investments into equity MFs.

“We have proposed that a separate limit of Rs.50,000 should be set for tax exemption for ELSS. This limit should be over and above the Rs.1.5 lakh currently allowed under section 80C of Income-tax Act for exemption,” said the second person mentioned earlier in the story.

Additionally, the industry has asked that MF units should be included in the list of assets that qualify for long-term capital gains.

Profit on equity shares sold on stock exchanges in India held for less than 12 months are taxed at a flat rate of 15%. Sale of shares that have been held for more than a year do not attract tax, this is referred to as long-term capital gains tax.

“We have sought that schemes which invest into infrastructure assets should also qualify for long-term capital gains,” said the CEO of a leading AMC, quoted above.

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