Amfi sets up panel on service tax modalities

Mumbai, March 24 | Updated: Mar 25 2005, 05:30am hrs
With mutual funds (MFs) made liable for payment of service tax in Budget 2005-06, the Association of Mutual Funds in India (Amfi) has set up a service tax committee. The panel will examine the operational modalities for service tax payment and will be chaired by Lalit Varmani, head of risk management at Birla Sun Life AMC. Earlier, MF distributors used to make the payment.

The committee has been set up to chalk out modalities of payment of service tax from the AMC end. We are preparing a report on the same and will do our best to see that the investor is not affected. Mr Varmani told FE. Sources informed that Amfi plans to make a representation to Sebi to raise the expense ratios of MF schemes to accommodate the payment of service tax.

While some distributors are happy that the onus of service tax payment is no longer on them, as it saves them a lot of paper work, a section of the community still remains disgruntled. Some MF distributors strongly feel that service tax will now be passed on to them by merely deducting tax from already low brokerages.

According to Sameer Kamdar, national head-mutual funds, Already there is a clear case of double-standards with regards to service tax. While AMCs have raised the entry load on equity funds from 2% to 2.25% thereby making investors bear the service-tax element, but are unwilling to do the same for debt funds under pressure from large investors. They have not raised their expense ratios to adjust for the service tax incidence and currently distributors have to bear the burden. Making distributors pay service tax from their own pockets is a big negative.

The service tax element on debt funds is quite low from one basis points (bps) for liquid or floating or fixed maturity plans (FMPs) to 2-3 bps for long-term debt funds. This can easily be added on the expense ratios of the funds, but AMCs are not willing to do this. Debt fund brokerages have fallen to historic lows and by making distributors pay service tax out of their own pocket is a big negative trend, he added.

Expense ratios is the percentage of assets that are spent to run a mutual fund. Expenses of a mutual fund include things like distributor costs, management and advisory fees, travel costs, and other operational expenses. Of this the largest share is that of distributor costs. High expense ratios can seriously undermine the returns from the MF schemes for investors.