Come Budget 2016, the mutual fund industry will get full and final relief from its service tax headache. The Association of Mutual Funds of India (AMFI), the fund industry body, has negotiated with the Central Board of Excise and Customs to levy service tax only on those agents and distributors who earn a total commission of ?10 lakh and above. The announcement is expected to be made in the next Union Budget, CVR Rajendran, AMFI CEO, told BusinessLine.

Disgruntled distributors
The debate about who pays service tax has been raging in the industry since Budget 2015 withdrew the service tax exemption for MF distribution. Since the government did not want the investors to bear the cost, fund houses and distributors were passing the buck between themselves about who should pay this extra 14 per cent tax. By September, fund houses settled into the practice of collecting the tax from distributors and remitting it to the tax authorities on their behalf. Distributors were disgruntled because regardless of the size of their commission, they all had to bear the extra 14 per cent cut in income.

With the expected amendment to the tax rule, only about 4,600 distributors (of the roughly 70,000) with commission income above ?10 lakh will be affected.

“Our stand from the asset management company’s point of view,” Rajendran said, “is that if at all there is a tax that was not there at the time of signing the contract (between the fund house and the distributor) and has come subsequently, that is to be borne by the distributors.

“Service tax is applicable only when the income is more than ?10 lakh. Today, because of the reverse tax mechanism, almost all of the distributors are being treated equally as the tax is paid by the AMC. Now we are saying that this tax should be payable not at the AMC level, but only at the distributor level.”

The AMFI made a representation with the government stating that this reverse tax mechanism is is driving away most of the industry’s distributors.

“We don’t have 22 lakh distributors the way the insurance industry has,” Rajendran added. “Neither do we pay 35 per cent upfront commission to distributors the way they do. Getting and retaining a distributor is a challenge for the mutual fund industry. What we are saying is exempt these people below the ?10-lakh slab from paying this tax.”