MF Distributors Up In Arms On Service Tax, Plan To Move CBEC

Mumbai, March 28 | Updated: Mar 29 2004, 05:30am hrs
The debate on the issue of service tax in the mutual fund (MF) industry has taken yet another interesting turn. With asset management companies (AMCs) communicating that they would not pay anything over and above an all-inclusive fees to the distributors of MFs, the distributor community is now planning to send a formal representation to the Central Board of Excise and Customs (CBEC) within a fortnight or so.

The distributors, who are currently a loosely knit family of financial intermediaries, also plan to set up a representative body which will articulate their interests in future with CBEC.

The distributors will plead their case to the CBEC stating that the investor is the end-recipient of the financial service, and he/she should be made to bear the burden of the service tax. They also plan to suggest that the AMCs should be collecting the service tax from the investor in addition to the fund management fees (like in the insurance industry) and in turn pass it on to the distributor.

Currently there are 1,19,000 distributors, selling MF units and 31 AMCs.

Sandeep Parwal, managing director of the Delhi-based SPA Capital Ltd said, the agents and brokers of mutual funds are largely unorganised at this stage and thus our voice is muted in the absence of a formal representative body. The issue of service tax is a pressing concern for all of us as it has a direct impact on the bottomlines of our businesses and the current system of regulation is hampering the progress of our profession.

Mr Parwal said distributors had already made informal representations to the finance ministry recently and were working on the modalities of a formal presentation to CBEC shortly.

We want to project the fact that the insurance industry already charges a service tax to its clients and the distributor is not made liable to pay the same. In case of MF units too, the same treatment should be followed, as it is a financial service of the same nature, he emphasised.

Another large distributor closely following the developments said on the condition of anonymity: The AMCs are already charging a distribution tax from the investor, by which their margins are protected. But they do not seem willing to increase our brokerage commission.

The formal body of representatives from the distributor fraternity will also try and rope in the Association of Mutual Funds in India (Amfi) before making a formal presentation to the CBEC, a few prominent distributors said.

Currently, CBEC states that services of mutual fund distributors are primarily in the nature of services of commission agents in relation to the category of services mentioned in the definition of auxilliary services and hence are leviable to service tax under this category.

Distributors unanimously feel that the CBEC, while being clear on the issue that service tax has to be eventually paid by intermediaries (agents and brokers), is silent on the crucial issue of whether it is recoverable from the AMC or the investor.