The service tax on mutual fund (MF) agents has put the industry and distributors in a quandary. While some industry officials and agents want it to be included in the total expenses ratio (TER) borne by investors, they fear the distributor community would be made to pay the tax.

MF distributors were paying service tax at 12.36% when it was introduced. Distributors were exempted from the tax in 2012. The union budget has however brought MF agents under the service tax net again. This means that fund houses would have to deduct a service tax of 14% on commissions paid to distributors henceforth.

The move comes at a time when the market regulator Sebi is looking to cap upfront commissions paid to distributors. If service tax on MF agents is included, it would increase the TER from about 2.5% to 2.64%.

"Service tax has to be collected from investors," says Suresh Parthasarathy, president, Independent Financial Professionals Association. For instance, when shares are bought and sold on the stock exchanges, it is the investor who pays service tax and not the broker, he points out. "Since both the services are similar, service tax has to be collected from the investors," he says.

A senior official with a leading fund house says since the service is being availed by investors, they should pay the tax as well. "The (MF) industry wants the impact on the industry to be minimised. We are trying to make it (service tax) as part of TER," says a top official with a bank-sponsored fund house.