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Service tax on mutual fund distributors must be abolished
February, 24th 2016

The year 2015-2016 has been a challenging time for mutual funds (MF) Industry. Regulatory changes have made it an operationally expensive business to operate. Let’s look at one of the major impacts that the mutual fund advisors faced - Service tax!

Service tax under the reverse charge mechanism was introduced on the commissions earned by MF advisors from April 02, 2015. This means, that if the advisors earned Rupees 100, Rs. 14.5 is deducted and rest is paid out to the advisor. (0.5% Swacha Bharat Cess was implemented from Nov 1, 2015). This has been a huge dampener on the earnings. It has always been perceived that the MF advisors make a handsome commission on the sale of MF products which is nothing but a myth. If compared to the ever mis-sold insurance products, what MF advisors make is pittance! Besides, there is an on-going service required for the clients unlike insurance where only premium cheques have to be collected each year.

Expectations from Union Budget 2016:

- Abolish service tax on MF advisors. The industry is yet to evolve compared to the developed markets. On my recent visit to the United States, I found that their systems and processes are far more advanced and customer friendly. To make MF a retail product and make it available to the common man, advisors must be able to reach them. This is possible when they open more branches. For fund houses to open branches to increase penetration does not make sense as reach is restricted to only that particular fund house’s products. However, an advisor can advise on the entire bouquet of products from all fund houses. Instead of cutting their hands by levying more taxes, support them by helping them reach the common man. Though online can make it available, internet reach and smart phone penetration is yet to come to a respectable level.

- ELSS limits must be enhanced to at least Rs 250,000. Over the years, ELSS limits have increased from a paltry Rs 100,000 to Rs 150,000. It is a known fact that ELSS has given far superior return than the traditional Section 80C products. To increase wealth, participation in equities is the best route. Why not encourage it? Why does ELSS have to be part of Section 80C? If limits cannot be increased, make it in-line with the pension schemes under Section 80CCD.

- Market grapevine is that equity investments will have to be held for 36 months for long term capital gains exemption. Naturally, same will be applicable for equity MF too. Though this will encourage long term investments, at a time when the industry is nascent, it may be a mood dampener. Besides, it will make ELSS schemes non-existent. It is definitely avoidable for now.

- Simplicity of the investment must be considered: For example, assume that one is invested in a debt scheme which has been an under performer. Such investor wishes to move out purely to better his returns. He should be able to move between schemes of different fund houses as long as he in the same category of investment without paying short term capital gains. This will not only help investors to be more prudent but, will also put pressure on fund managers to perform.

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