Service tax burden still with MF distributors

CBEC will re-examine the matter on Cenvat credit after a fresh representation by Amfi

The service tax issue has returned to upset the 90,000-strong mutual fund (MF) distributor community.

In a note sent on Tuesday, the Association of Mutual Funds in India (Amfi) asked fund houses to continue the current practice in collection and payment of service tax, and continue deducting the 14 per cent tax from the commission paid to distributors.

Last month, the Central Board of Excise & Customs (CBEC) had put out advertisements that asset management companies (AMCs) would have to bear the service tax burden. Distributors took this to mean they would be exempt from paying the tax from their own pockets.

However, in a recent meeting between Amfi and CBEC, the latter clarified it was not concerned about who bore the tax, as long as it was collected. “The loading of service tax in the commission amount is a subject matter of commercials between two parties and service tax authorities have nothing to do with it,” it said.

In a note to its members, Amfi asked fund houses to maintain status quo on the current practice in collection and payment of the tax, being paid by AMCs/MFs under the reverse charge mechanism. This involves deducting it from the commission paid to distributors and depositing it with the tax authorities.

“It’s back to square one for the distributor community. We are hoping this is not the end of the matter and that we can take it up again with Amfi and market regulator Sebi,” said a senior official from a top distribution house.

TAXING ISSUE
Amfi says status quo to continue, after meeting with CBEC; latter will re-examine matter on Cenvat credit after fresh representation

• Amfi recently met CBEC to clear the confusion surrounding the latter's service tax advertisement issued last month
• CBEC clarifies that it is not concerned about who “bears” the service tax as long it is “collected”
• MFs will continue to deduct service tax from commission paid to distributors
• The status quo is a body blow to the 90,000 strong distributor community
• For bearing the service tax, AMCs might have had to increase the asset management fees by 10-20 bps

According to Niren Shethia, director at PwC, usually under any tax law, the government fixes responsibility on who will ’pay’ the tax, and not on who will ’bear’ the tax. “Paying tax is a contractual agreement between the service provider and service receiver or between the buyer and the seller. The CBEC in its advertisement used the word ‘borne’ by the AMCs, which was incorrect. They have rightly clarified that the person who will ‘bear’ the tax is not their concern.”

Added a chief executive of a top fund house: “If AMCs had to bear the service tax, they might have to increase the management fees by 10-20 basis points. This, in turn, will require the market regulator’s permission, causing further delays in tax collection and payment.”

Further, on the subject of Cenvat credit, CBEC said it would examine the matter in greater detail after Amfi made a fresh and detailed representation. “Mutual fund entities are not eligible to avail any credit of distributors’ commission. Further for AMCs, admissibility of credit depends upon the facts of each case and contractual arrangements,” said Shethia.

The recent meeting between Amfi and CBEC was held to clear the confusion surrounding the advertisement. Amfi pointed out that the word “bear” in the ad was taken by distributors/agents as a mandate for AMCs/MFs to bear the service tax. The line in the ad stating that the service tax paid by MFs would be available as credit on output services had also created confusion. The sectoral body observed that while the advertisement was issued, no notification or circular was subsequently released for clarification.