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MFs may be freed of service tax loads
April, 17th 2007

This should come as a major relief to fund houses who have been on the tenterhooks for the past few months over the issue of service tax. The finance ministry is veering round to the view that the entry load and exit load charged from investors by mutual funds should not attract service tax.

Loads are charges that investors bear while buying or selling MF units, and MFs use this money to recover scheme expenses on distribution, marketing, advertisement and roadshows. A recent Central Excise and Service Tax Tribunal judgement has held that service tax cannot be levied on entry load and exit load charged by mutual funds. The government is likely to toe the line taken by tribunal on the issue.

The judgement has set the tone, but a final view on the issue would be taken soon, a source said. The government may issue a clarification on it soon, he said. The Directorate General of Central Excise Intelligence (DGCEI) had in May 2006 written letters to fund houses enquiring if they were paying service tax on entry load and exit load collected from investors. It had even sent a note to the Central Board of Excise and Customs on the issue favouring levy of service tax on entry and exit load.

When an investor buys into a mutual fund scheme, he has to pay a little extra over and above the price of the unit, and that extra amount is called the entry load. Similarly, when he sells his units, the fund levies a charge. This charge is called exit load. It is deducted from the net asset value passed on to an investor at the time of redemption. Both these charges are scheme-specific and a mutual fund may decide whether to levy either, both or neither.

If service tax is levied on entry/exit load, it may well be passed on to investors, leading to increase in their costs per unit. The directorates original view was that entry/exit loads reflected the value of the service rendered by the mutual fund and thus should attract service tax.

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