Mutual fund agents and distributors have cause for cheer as the Central Board of Excise and Customs (CBEC) has made it clear they need not fork out service tax on services provided by them.

The liability to pay the service tax will fall on the mutual funds and the asset management companies, CBEC has said. However, the mutual funds and AMCs can set off the service tax paid by them against the service tax payable on their output services.

This CBEC stance has come as big relief for mutual fund distributors who had cried foul over the Budget announcement to withdraw service tax exemption and bring them under the service tax net.

Margin squeeze

Small-time distributors of mutual funds were finding the going tough as they faced some squeeze in margins given that they had to pay the tax out of their pockets.

“With the Ministry clarifying that only AMCs should bear the service tax, it is a great relief for distributors. Now the distributors can concentrate on their business and help improve the penetration of mutual funds,” Suresh Parthasarathy, President, Independent Financial Professionals Association (Chennai), told BusinessLine.

Ever since the Budget announcement, mutual fund distributors have been raising this issue at various forums, suggesting they should not be penalised. The main contention of the distributors was that they only sell the asset management companies’ products and therefore, they should not be burdened with having to pay service tax.

With the Centre increasing the service tax rate to 14 per cent in this year’s Budget, the levy was seen to be harsh if imposed on the distributors, who anyway were working on slim high commissions.

Mass exodus

The commission structure in mutual fund distribution had come down drastically over the recent years, leading to an exodus of people from the industry.

Currently, there are only about 6,000 people actively engaged in mutual fund distribution among the registered universe of over a lakh individuals. Nearly 95 per cent of the investments into MF schemes in India come through distributors.