Indian mutual fund trade body, Association of Mutual Funds in India (Amfi) in its board meeting has decided to approach the ministry of finance and market regulator Securities and Exchange Board of India (Sebi) regrading the service tax issue. Amfi has also decide to review the announcement of capping upfront commissions to 1%.

The Union Budget had proposed withdrawal of the service tax exemption given to mutual fund distributors, and increased the service tax to 14% from 12%, which was the main bone of contention among several MF distributors.

HN Sinor, CEO of Amfi said, “We have decided to take up the matter of service tax with ministry of finance and Sebi and hopefully, arrive at a solution soon.” He added that concerns of large distributors on capping the upfront commissions will be reviewed.

Amfi had directed all the fund houses to cap upfront commissions at 1% from April 1, 2015. Since the announcement was made in late March, the distributor fraternity had voiced their concerns on the commission structure. While there will be a cap on upfront commissions, fund houses can decide the trail on their own, on perpetual basis. Trail commissions are paid to distributors as long as investors stay invested in the scheme.

A CEO of a leading fund house who attended the board meeting said, “There are some reservations on both the issues of upfront commissions and service tax. While commission issue can be resolved by Amfi, I think it will be difficult to solve the service tax matter. Distributors want the 14% service tax burden to be passed on to the investor through increase in total expense ratio (TER) of the scheme. But asking investors to pay up will have a huge negative impact on the mutual fund industry.”

Current rules allow fund houses to charge 2.5% as expense ratio on schemes. “Though there are several ongoing arguments about who should pay the service tax, I believe it has to be borne by distributors themselves. We will wait for some clarity from the regulator as well as the finance ministry on the matter,” concluded another person who was at the Amfi board meet.